Pennsylvania Public Schools tweaks co-investment policy, increases individual commitments

Pennsylvania Public School Employees’ Retirement System increased its co-investment and secondary investments program limit from $500 million to $750 million for 2018. It also added $10 million for follow-on investments in each co-investment deal.

The co-investment program is spread across all asset classes; private equity accounts for $750 million of the $1.2 billion in co-investments, said Charles Spiller, deputy chief investment officer of the pension fund. The system invests up to $25 million in individual deals.

Drilling down into the co-investment program further, PA Schools invested $500 million in global private equity deals, and $250 million in Pennsylvania, Spiller said.

“The internal program has generated strong returns and exceeded our expectations,” Spiller said.

The pension fund has invested in more than 30 co-investment deals and is committed to building it up further, Spiller said.

The overall contributions of the PE co-investment program were $424.3 million, distributions were $137.2 million and valuations were $594.3 million, as of June 30, 2017, the pension fund noted in an email to Buyouts.

PA School’s private equity co-investment program has generated an IRR of 31.5 percent since inception in 2012. It has generated an IRR of 29.2 percent for one year, 27.7 percent over three years and 30.7 percent over five years, the pension fund told Buyouts.

The pension fund sees robust deal flow for co-investments, “but we are relatively picky and don’t say yes to each deal,” Spiller said.

Two members of the six-person PE team look exclusively at the co-investment deal flow, though everyone pitches in when required, Spiller said. Each co-investment opportunity is analyzed and recommendations made to the Allocation Implementation Committee, he said.

“We are pretty nimble and make a decision in 2-3 weeks and even sooner if we already have done a co-investment with the manager,” Spiller said.

The $7.4 billion private markets portfolio was 13.6 percent of the total fund allocation at the $56 billion school retirement system. It includes PE, venture capital and private debt.

Of this, PE accounted for 68.5 percent of the portfolio and the internally managed co-investments were at 4.2 percent as on Sept. 30, 2017, pension documents said.

The pension fund also added its investment adviser, Hamilton Lane, to its co-investment process. Co-investment opportunities will be vetted first by Hamilton Lane and then by the system’s co-investment team.

The fund will also look at co-investments from active relationships of both PA PSERS and Hamilton Lane, according to pension documents.

Co-investments are expected to return a 3 percent premium above public-market comparables over a 10-year period. The time horizon for co-investments is three to seven years, according to pension documents.

Private markets returned 17.31 percent over the one-year period, 9.61 percent over the three-year and 10.31 percent over the five-year, as of Dec. 31, 2017.

The total fund returned 12.30 percent over the one-year period, 6.91 percent over the three-year and 7.622 percent over the five-year, as of that date.

Action Item: Read on PA Schools investment performance here https://bit.ly/2J3GldV