Pennsylvania PSERS Looks Overseas With Half Billion In Pledges

Judging by its latest round of commitments, the $62.7 billion Pennsylvania Public School Employees’ Retirement System (PSERS) sees plenty of opportunity abroad.

The limited partner recently committed varying amounts to funds focused on European non-performing loans, non-U.S. companies with operational problems, and pan-European middle-market investments. It also snuck in a few bucks for U.S. venture capital firms, but it was a fairly small share of the more than $500 million in commitments.

First, the board approved a pledge of up to €100 million ($138 million) to a side fund to Apollo European Principal Finance Fund LP, which is targeting €1.5 billion ($2.1 billion) with a €2.0 billion ($2.8 billion) hard cap. The firm plans to acquire non-performing loans, including residential or commercial real estate loans, and corporate and individual debt, primarily in the United Kingdom, Germany, Spain and Portugal. This would be Apollo Management LP’s first non-performing loan fund, and the shop is seeking to generate an unlevered 20 percent gross IRR. This is Pennsylvania PSERS’s first relationship with Apollo.

Sticking with its Western European theme, the board also committed up to £120 million ($213 million) for HgCapital 6 LP, which is a £1.75 billion ($3.1 billion) fund, with no established hard cap, that invests in European middle market companies, mainly in the United Kingdom, Germany and the Benelux region. HgCapital expects to invest in 15 to 20 companies, making an average equity investment of £80 million ($142 million) to £120 million ($213 million). The sector-based vehicle focuses on telecom, media, technology, industrials, health care, consumer, leisure and the service sectors. Pennsylvania PSERS notes that Hg 5 (2006 vintage) generated a 22 percent gross IRR as of June 30, 2008. This is another new relationship for the pension fund.

The board also approved a commitment of up to $200 million to Cerberus Institutional Partners International LP. The fund is expected to be a $1.5 billion to $2 billion vehicle focused on non-U.S. investments in companies with operational problems or with debt trading at deep discounts. The firm intends to take control companies through privately negotiated transactions or via the purchase of distressed securities. The LP reported that Cerberus Series II (vintage 2001) generated a net IRR of 29.2 percent as of March 31, 2008; Cerberus Series III (vintage 2003) a net IRR of 24.1 percent; and Cerberus Series IV (vintage 2006) a net IRR of –8.3 percent. This is the LP’s fourth pledge to a Cerberus Capital Management LP vehicle.

And finally, the board committed up to $68.75 million to Gold Hill Capital 2008 LP, a $225 million fund with a hard cap of $275 million that makes loans to U.S. venture-backed technology and life sciences firms. The firm intends to make loans of $1 million to $12 million to companies at the pre-revenue, early revenue and rapid-growth stages of development. This is the LP’s second commitment to San Jose, Calif.-based Gold Hill Capital.

Pennsylvania PSERS had 9.1 percent of its total portfolio invested in private equity as of June 30, 2008. Private equity is a part of the private markets asset class that comprised 12.8 percent of the total portfolio. The target allocation for private markets is 13.0 percent.