Two pensions in the Golden State-one in Los Angeles and one in Merced – are shaking things up a bit with their investment strategies in light of the state’s massive budget shortfall.
Merced County Retirement System will make $18.5 million of new investment capital available for private equity funds, while separately Los Angeles City Employees’ Retirement System (LACERS) is mulling a new class of alternative investments for its portfolio.
The $370 million Merced County Retirement System’s investment committee voted to commit up to 5% of its portfolio to private equity funds at its meeting last month, its first-ever commitment to the asset class.
The pension fund still has to formalize its investment plan, but a fund-of-funds group will likely manage the allocation, said Merced County’s Chief Investment Officer Richard Stensrud.
Merced County expects its new private equity portfolio to deliver 12% returns.
After two years of negative numbers, Merced County’s pension fund posted a modest profit of 5.5% for the fiscal year ended June 30.
Still, it is in a precarious position. If it cannot meet its 8% actuarial hurdle, then it will have to ask for larger contributions from its members, the county and the state to guarantee benefits to its retirees.
It is not an immediate problem, but it is an issue that all California pension funds must address as the state’s $38 billion budget shortfall threatens to worsen the situation.
Like others, Merced County has tinkered with its investment strategy to ward off a crisis even if the financial markets do not pick up.
“By lowering projected returns in a number of other categories, the modeling software pushes you to look at categories with higher historical returns,” Stensrud said. “There’s been volatility and serious bloodshed in the private equity market over the last few years, but it historically has delivered good numbers, and we are long-term investors.”
Merced County’s portfolio will include a mix of buyout and venture capital funds. It will be another four to six months before the pension fund is ready to deploy the capital.
Meanwhile, the $8.9 billion LACERS plans to use up to 10% of its private equity allocation to invest in non-traditional assets. The new $6.2 million allocation will not go to buyout or venture capital funds. But where it will go is unknown, said Dan Gallagher the pension fund’s chief investment officer.
“It’s still exploratory,” he said. “We’re going to look at the market to see if there’s something we’ve been missing.”
LACERS has a $620 million private equity allocation, 7% of its total assets. It is a limited partner in buyout funds managed by the Blackstone Group, Kohlberg, Kravis & Roberts, Madison Dearborn Partners, Welsh Carson Anderson & Stowe, and venture capital funds managed by InterWest Partners, Menlo Ventures, New Enterprise Associates, Oak Investment Partners and Summit Partners.