South Carolina looks for fee savings in co-investments, secondaries

South Carolina Retirement System Investment Commission plans to reduce its private equity fees by committing more to co-investments and secondaries.

The system said a new co-investment platform will help move the needle on fees.

CIO Geoffrey Berg said at the commission’s April 11 meeting that the state had recently concluded negotiations on a co-investment platform with GCM Grosvenor, and it had been developing internal policies that would enable it to move faster on co-investment opportunities.

The platform has already increased the number of co-investment opportunities that have been offered to the system, Berg said.

“We are seeing a tremendous amount of co-investment opportunity now because we have the platform, Berg said. “More importantly, we have a process where we can leverage the deep work that we’ve done to get to know the general partners that run these funds, so that when they show us an opportunity, we’re able to get them an answer and stand behind that answer and deliver capital at the appropriate time.”

While co-investments are the easiest way for South Carolina to reduce its overall PE costs, it is also looking at buying on the secondary market at a discount, Berg said.

“Right now, we are looking at secondary opportunities,” Berg said. “If you acquire a secondary fund, you may step into a situation where you are paying 2 and 20, but you didn’t pay 100 cents on the dollar for that opportunity.”

One thing that hasn’t worked is trying to get GPs to move away from the standard arrangement of 2 percent management fees and a 20 percent carried interest rate.

“Negotiation is very challenging right now, because the world, in a low-return environment, flocks to things that it believes are higher return,” Berg said.

South Carolina also made one PE investment since its March meeting, committing $75 million to Providence Strategic Growth IV, a $2 billion fund that focuses on software and technology-enabled services businesses in North America.

Providence Strategic Growth will pursue a buy-and-build strategy, creating broader platforms that are attractive to larger technology-focused private equity funds. It plans to hold 15 to 20 deals in the portfolio, with equity investments ranging from $5 million to $75 million apiece.

South Carolina also committed $75 million to Providence Strategic Growth III, which closed last year on $1.3 billion. South Carolina said it had some concerns about the speed at which Providence came back to market with a larger fund, but it decided that Fund IV was worth the risk.

South Carolina has a 7 percent target allocation to private equity and had $29.2 billion in total assets as of Dec. 31.

Action Item: View the materials from SC Retirement System Investment Commission meetings here https://bit.ly/2XhYL1m