Ohio pension sets aside $1.4bn for private markets in new asset mix

The $15 billion Ohio School Employees’ Retirement System (Ohio SERS) approved a new asset allocation that carved out a new asset class of private credit and increased exposure to global real assets and global private equity portfolios at the expense of hedge fund strategies, which are being eliminated as distinct asset class. The shift of $1.4 billion to private market investments is significant and was done upon the recommendation of the pension’s general investment consultant Wilshire Associates, which said the change should improve return expectations. The greatest shift is the new 5% target allocation to private credit, which comes after staff gained experience investing in the space by managing 12 funds with six managers in Ohio SERS’ opportunistic portfolio. The fund had the leeway to allocate up to 5% to the asset class already and currently, officials said, private credit investments comprise about 2% of the total fund and includes direct lending and structured/distressed credit strategies. The existing private credit investments will be transferred to the new portfolio in July and will include a new allocation of $75 million to LBC Credit Partners V, a middle-market direct lending strategy within the opportunistic portfolio. The private credit asset class is expected to produce a distribution yield near 6%, which is higher than expected yields for all other asset classes. Adam Messerschmitt joined the investment staff in February to manage private credit assets. Previously, he was the director of investment manager research with Nationwide Insurance’s Investment Management Group where he subadvised assets in U.S. small cap, non-U.S. equity, and emerging markets equity, and conducted underwriting for alternative investments that included private equity, private debt, private real estate, infrastructure, and hedge funds. He also worked for Morgan Stanley Investment Management in New York. The full transition from the current allocation to the new asset mix is expected to take place over a two-year period. Also within private markets, global real assets will receive a bump up to 17% from 15% of overall assets. Private equity will get a boost of 2% to total 12% of assets. Trustees last month, approved a $50 million commitment to Kohlberg IX, a middle market buyout strategy within the private equity portfolio. While the plan to ax the multi-asset strategies portfolio was announced, the investment committee still approved a $20 million commitment to PGIM Global Liquidity, a relative value strategy within the multi-asset strategies program. Previously, the multi-asset strategies portfolio (hedge funds) had a 10% target. Although the portfolio played a role as a risk diversifier in the total fund, a policy allocation was no longer warranted because the fixed income portfolio has been customized to perform a similar diversification role with expected higher returns, pension fund officials said. Modeling for the asset/liability review began in September 2019. Staffers and Wilshire investigated numerous allocation scenarios with the goal of improving the expected return of the overall fund without significantly increasing risk. The new allocation is expected to increase expected return by 14 basis points and risk by 51 basis points, while keeping the Sharpe ratio unchanged at 0.36.

Ohio pension sets aside $1.4bn for private markets in new asset mix

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