LPs

San Diego city pension aims to commit $125 mln in fiscal 2019

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San Diego County Employees’ Retirement Association, private equity, limited partner, pension fund, Founders first capital partners
Downtown San Diego.
  • $8 bln plan has 10 pct target for PE
  • StepStone committed just $39 mln to PE last year
  • StepStone will pursue secondaries, “seasoned” primary funds, other strategies to mitigate J-curve

The $8 billion San Diego City Employees’ Retirement System expects to commit $125 million to private equity and infrastructure funds through a StepStone-managed account, triple the $39 million StepStone allocated in the past year.

SDCERS commits to PE and infrastructure through two accounts, one managed by StepStone and one by GCM Grosvenor. Each manager is responsible for half the retirement system’s target allocation of 10 percent to PE and 3 percent to infrastructure.

The retirement system approved an accelerated pacing strategy for GCM Grosvenor in September, and approved a similar plan for StepStone at its November meeting.

StepStone was short of its planned commitment pace for fiscal 2018, committing $39 million against a projected $75 million, and it proposed $125 million of commitments in fiscal year 2019.

SDCERS’s PE investing slowed in 2016, 2017 and 2018 as it neared its target and as market volatility ultimately reduced the overall value of SDCERS’s portfolio, meeting materials show.

While it plans to increase its pacing, StepStone won’t meaningfully change the types of PE opportunities it plans to pursue, Investment Officer Jamie Hamrick said.

“They will continue to favor secondaries, co-investments and seasoned primaries to diversify the portfolio,” Hamrick said at the Nov. 9 SDCERS meeting.

“J-curve mitigation will continue to be a focus by focusing strategies that can lower the risk profile and provide earlier distributions.”

For primary funds, StepStone aims to commit more capital to a limited pool of core managers, targeting commitment sizes of $10 million to $30 million per fund investment.

For secondary funds, it will seek to make commitments of $1 million to $30 million, with a particular focus on smaller deals that it expects to provide the best opportunity in the current secondary market.

StepStone will focus its PE investments on healthcare, consumer and industrials.

As part of its effort to mitigate the J-curve, StepStone will continue to focus on secondaries and other special-situation strategies.

SDCERS’s PE portfolio has a healthy distribution yield, so StepStone is lowering the priority of cash-yielding strategies such as mezzanine and distressed debt, while continuing to focus on secondaries, meeting materials show.

StepStone has already deployed $20 million of its new $125 million target in the first three months of the fiscal year, according to meeting materials.

SDCERS’s private-markets account with StepStone is above its target allocation of 6.5 percent and sits closer to 8.4 percent, but is expected to trend toward the target over the coming years, StepStone said.

Action Item: Learn more about StepStone’s approach for SDCERS: https://bit.ly/2QEZve1