Sacramento pension carves out growth equity allocation as it ramps private equity focus

Sacramento County Employees’ Retirement System increased its PE allocation to 11%, also adding a 15% target growth equity sub-strategy.

Sacramento County Employees’ Retirement System voted to increase its private equity allocation, upping its target to 11 percent from the prior 9 percent and the recommended range getting bumped up to between 8 percent and 14 percent.

The SCERS portfolio had a 12.2 percent allocation to private equity as of June 30, 2021 – which is up from 10.6 percent on March 31, 2021.

“The run up in the allocation is due the exceptionally strong returns that private equity generated over that past year, which came in at about 61.9 percent for the fiscal year ending June 30, 2021,” said Jamie Feidler, senior managing director of Cliffwater LLC, SCERS’ alternative investment adviser.

“The extended range accounts for the increased target allocation and allows for greater flexibility in managing a mature private equity portfolio around the target.”

The board also approved adding a 15 percent target growth equity sub-strategy to complement the existing buyout, venture capital, and distressed sub-strategies at the Sept. 15 meeting.

Ten funds in SCERS’ portfolio will be re-classified as growth equity: Accel-KKR Growth Capital Partners II; Accel-KKR Growth Capital Partners III; Spectrum Equity VII; Spectrum Equity VIII; Spectrum Equity IX; Summit Partners Europe Growth Equity Fund II; Summit Partners Europe Growth Equity Fund III; Summit Partners Venture Capital III; Summit Partners Venture Capital IV; Summit Partners Venture Capital V.

According to the presentation, the total market value of the above funds represented 13.7 percent of the PE portfolio as of March 31, 2021. Cliffwater recommended a 15 percent target allocation to growth equity, with a recommended allocation range of 10 percent to 35 percent.

“The SCERS private equity portfolio is intended to enhance total fund performance and it is expected to outperform public equities by 3 percent annually over the long-term,” Feidler said.

As of March 31, 2021, the portfolio was expected to have an internal rate of return of 28.88 percent over the next three years, 24.61 percent in the next five years and 18.76 percent since inception.

SCERS committed $200 million in 2021 and has not yet set the budget for fiscal year 2022. The plan also calls for “continued educational discussions around PE secondary sales.”

“Although SCERS has no immediate needs for secondary sales, formalizing a process is beneficial now that SCERS has reached its targeted allocation,” Feidler said. “I don’t see us having to force any sales, as we have an attractive portfolio, and we are putting a process in place to execute this new [secondary] strategy.”