Pension Fund Jumps into PE Arena

The $3.2 billion San Bernardino County Employees’ Retirement Association (SBCERA) of California will allocate up to 7% of its assets, or $224 million, to private equity investments once it selects a consultant, which it expects to do during the pension fund’s September investment committee meeting.

Despite sagging returns and an industry-wide shakeout, SBCERA is the second public pension fund to jump into the private equity arena in recent months. In May, the $6 billion Indiana State Teachers’ Retirement System said it would allocate up to 5% of its actively managed assets, or $150 million, to alternative investments.

After SBCERA picks a consultant it will outline its private equity investment strategy. Adams Street and Pathway Capital Management are up for the job and each will make a presentation to the investment committee next month. Without a consultant, the pension fund cannot offer a timeframe for reaching its new allocation target, nor can it determine what mix of venture capital or buyout funds it will hold in its portfolio, says Donald Price, an investment analyst with SBCERA.

Still, the shift into private equity will mean SBCERA must scale back on domestic public equity and international fixed income positions in the coming fiscal year. Domestic and international equity accounts for about 60% of the fund’s assets, while another 30% is held in U.S. and international fixed income.

SBCERA’s board first voted to enter the private equity sector in November, following an annual investment forum in which the board instructed the fund’s staff to investigate the asset class and prepare a feasibility report.

For the fiscal year ending June 30, the fund posted losses of 4.3%, leaving it almost 12% short of the returns needed to meet its fund obligations. It is expecting its private equity portfolio to return at least 10%.

“The goal is to improve returns because we need to make sure we meet our actuarial hurdle of 8.16%,” Pierce says. “It’s a great time to get in. We think it’s a buyers market.”

Contact Carolina Braunschweig