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 at the September meeting of its investment committee.
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.
SBCERA has not yet outlined a private equity investment strategy. First it must select a consultant – Adams Street and Pathway Capital Management are up for the job and will each make a presentation to the plan’s 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 and buyout funds it will hold in its portfolio, said Donald Price, an investment analyst with SBCERA.
Still, the shift into private equity will mean SBCERA must scale back domestic public equity and international fixed income positions in the coming fiscal year. Domestic and international equity represents 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 asset class 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 a loss 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 percent.
“The goal is to improve returns because we need to make sure we meet our actuarial hurdle of 8.16 percent,” Pierce says. “It’s a great time to get in. We think it’s a buyers market.”