California pension plots private markets expansion

A dramatic $400 million expansion into private equity, private debt and private real estate is underway at one California County pension system. The moves at $4.5 billion Kern County Employees’ Retirement Association (KCERA) reflect the aim to have each of the three private market allocations total 5% of the overall portfolio or roughly $675 million in all, according to a presentation given at a recent trustee meeting. Private equity currently totals $72 million at Kern County with room to grow by at least $153 million. Starting its investment in the space in 1998, the pension fund hasn’t made a fresh commitment to the space since 2008. Historically, officials have pursued the fund of fund route to allocate to the asset class and have found the performance to be disappointing. The private equity portfolio is slated to include venture capital (early and late stage), growth equity and buy-out. Meanwhile, KCERA began investing in private credit only five years ago through the opportunistic allocation. With only $149 million in the portfolio, the asset allocation is far below the 5% allocation that was approved back in 2016. Private credit includes lending, direct lending and distressed securities, according to KCERA. Also, within the 2016 asset allocation, the real estate allocation was increased by 5% to 10%. And then two years later, in 2018, there was a line drawn between core real estate and private real estate – with allocations of 5% set aside for each. Yet, now the current market value of the private real estate portfolio is 1.2% of the overall portfolio. Private real estate encompasses infrastructure (power, transportation, renewables); natural resources (agriculture, timber, oil and gas); and real estate (core, value added and opportunistic). Cambridge Associates was recently hired as the investment consultant to all three private market segments.Officials were clear that private market investing offers higher returns and different sources of returns than public market investing in traditional stock and bond portfolios. Spread across five years, KCERA expects to make a $40 million allocation to a distressed debt fund this year and another $20 million allocation to a buy-out fund to begin ramping up the private markets exposure in 2020.

California pension plots private markets expansion

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