By David G. Barry
The Pennsylvania Public School Employees’ Retirement
System committed to four new funds and put in place pacing plans that will
help it reduce its allocations to private equity, private credit and real
estate – three segments that contributed to PSERS reporting a positive result
for fiscal year 2021-22.
The $75.9 billion system’s board approved commitments to two real estate funds
and two private equity funds.
On the real estate side, PSERS will invest up to $175 million in Cabot
Industrial Value Fund VII, L.P. and $125 million in DRA Growth and Income
Fund XI, LLC. It also committed up to $125 million in a private equity
fund, Incline Equity Partners VI, L.P. and up to $20 million in Insight
Vision Capital II, L.P., a fund-of-funds that will invest in women and
minority-led funds.
PSERS has invested with all four managers previously,
although this is its first time backing Insight’s fund of funds. It has in the
past backed its growth equity funds.
PSERS’ consultants also laid out plans for the system to
annually invest $800 million to $1 billion in private equity, $800 million to
$1 billion in real estate, $615 million to $815 million in private credit and
$700 million to $900 million in infrastructure.
As of August 31, PSERS’ had an actual allocation of 17.5% to
private equity, which includes co-investments. That is well above its 12%
target. Advisor Hamilton Lane said the pacing plan is aimed at reducing the
allocation to the 12% target in four years. PSERS’ prior annual private equity
pace was $900 million to $1.2 billion although it is expected to commit just
$775 million in 2022. During the 2021-22 fiscal year, private equity produced a
return of 22.6%.
Real estate, which was PSERS’ best-performing asset class during the fiscal
year, is currently at 8.6%, which is above its 7% target. The $800 million to
$1 billion pacing plan is aimed at getting the system to its allocation target
in four years, according to Hamilton Lane. For the fiscal year, real estate
generated a return of 41%.
The pacing plan for private credit is aimed at bringing the
investment segment down from its current 7% allocation to its 6% target,
according to advisor Askia. As part of a new asset allocation strategy approved
last year, the board lowered the target for private credit from 8% to 6%. It
produced a 7.7% return for the fiscal year. The pacing plan for private credit
had been $595 million to $795 million. So far, PSERS has committed just $315
million to the segment in 2022 and expects to end the year at under $550
million.
One segment that PSERS is seeking to increase is infrastructure. It stood at
1.5% in August. By investing $700 million to $900 million annually, Hamilton
Lane projects it will hit its 5% target for the sector in four to five years.
In addition to reducing private credit, the new asset allocation strategy also
increased public equities from 27% to 36%. Real assets also were reduced to
26%. The asset class was at 28% in March. The current allocation to the asset
class is 28.4%. Absolute return, or hedge funds, are being taken from 8% to
zero. It was at 7.4%.
PSERS was one of the few public pension funds to produce a
return during fiscal year 2021-22, reporting a gain of 2.28%.
PSERS also is continuing its search for a new chief
investment officer. Robert J. Devine, the system’s fixed income managing
director, has served as acting CIO since December, when James H. Grossman Jr.
transitioned to a senior advisor role prior to retiring in May. Devine has been
with PSERS since 1998.
Grossman and then-Executive Director Glen R. Grell moved to
retire in November after an investment calculation error led to the federal
investigation. PSERS in August said the Justice Department closed the probe and
would not be bringing criminal or civil charges against the system.
At that same time, PSERS began the search for a new CIO. No
timeline has been given for the search, which is being overseen by Hudepohl
& Associates. The 15-person PSERS board will make the final selection. The
CIO oversees a team of 70.
Thanks to underfunding for the 15 years prior to fiscal year
2017, PSERS, as of June 30, 2021, had an unfunded liability of $44 billion and
a funded ratio of 59.6%. The system has put in place a plan aimed at bringing
it to full funding. It is projected to reach 76% by 2029. In releasing its
2021-22 results, PSERS did not disclose its current funding ratio.
Founded in 1917, PSERS has a membership of 248,000 active,
243,000 retired school employees and 26,000 vested inactive members.