Pennsylvania pension weighs slowing private equity pace

The denominator effect rears its ugly head despite arguments that current market dislocation makes this an ideal time to increase private equity commitments.

Pennsylvania State Employees’ Retirement System could reduce how much it will commit to private equity in 2023 due to investment committee member concerns about the system’s overallocation to the asset class.

Multiple pension systems are facing overexposure to private equity and have to balance potentially slowing activity at a time that some argue is rife with great opportunities.

Pennsylvania’s private equity pacing plan was the subject of a discussion at its investment committee meeting held on December 5. Buyouts watched a webcast of the meeting.

While no formal action was taken at the meeting, investment committee members expressed concerns about the system’s current 20 percent allocation to private equity, above its target weight of 16 percent. The private equity asset class also includes the system’s private debt holdings.

Initially, investment staff and representatives from private equity adviser StepStone suggested a $1 billion commitment to private equity for next year. But some committee members said they believed $700 million to $800 million were more appropriate figures.

“Pacing is always a brilliant marketing plot because we’re always spending more money than our target. Given our current allocation, I’d be much more comfortable with a $700 million to $800 million target rather than $1 billion,” said Pennsylvania treasurer and committee member Stacy Garrity.

Deputy CIO Bill Truong said staff and StepStone would prepare to commit up to $800 million to private equity when further building out the 2023 pacing plan.

The system allocated up to $1.1 billion in 2022, according to StepStone.

During an earlier discussion, StepStone partner Mike Elio said the current market dislocation was an ideal time for LPs to invest in private equity.

“This is when companies become available for good prices, and when private market capital can step in. Now is not the time to run and hide but is the time to deploy more capital in this space at a measured pace,” Elio said.

In addition, the system made a $100 million commitment to Hellman & Friedman XI. According to Truong, Pennsylvania has had a 30-year relationship with the manager after participating in its second fund.

Correction: A prior version of this report incorrectly stated the pension system’s PE target, which is 16 percent. The report has been updated.