Pennsylvania pension adds nearly $1bn to real estate, private equity strategies

The summer break was cut short for the Pennsylvania Public School Employees’ Retirement System (PSERS), where trustees assigned allocations of $975 million across five new funds. Most of the fresh capital went to real estate/infrastructure investments, with a remaining $450 million going to three distinct private equity strategies. Officials at the $61 billion pension system also agreed to scrap the system’s risk parity program, which will result in the boosting of real asset exposure by 2% and equity exposure by 4% and fixed income by 6%. The managers of the risk parity program are BlackRock Institutional Trust Company; Bridgewater Associates; and D.E. Shaw Investment Management. Risk parity has been reporting losses with performance of -14% in the first quarter and the portfolio returned -5% for the 12 months ending March 31, 2020. “It was a wild quarter for private and institutional investors the world over and markets could remain volatile through the June 30 end of the fiscal year,” said PSERS Chief Investment Officer Jim Grossman. “We remain vigilant to market changes. Over a decade ago we re-structured our asset allocation in a way that would prevent the extremely high losses we experienced in the Great Recession, and we succeeded in that regard.” Some of PSERS best performing asset classes in the second quarter were: U.S. Long Treasuries (up 21.5%); gold (up 4.5%); U.S. TIPS (up 1.9%); and cash (up 0.4%). Those gains did not completely offset larger declines in other asset classes. PSERS’ public equity assets in large, mid- and small-cap indexes were -24.2%. PSERS Master Limited Partnerships (MLPs) were -48.8% and diversified commodities hit -26.6% as economic activity ground to a halt and oil prices plunged. Meanwhile, over the summer the school employee pension moved forward with a number of key mandates. I Squared Capital Advisors and PGIM were hired to manage real estate and infrastructure investments upon the advice of consultant Hamilton Lane. PSERS committed $400 million to the ISQ Global Infrastructure Fund III, which is expected to raise $12 billion. This is the system’s first investment with ISQ, which was founded in 2012 by Morgan Stanley Infrastructure Partners alums Sadek Wahba, Gautam Bhandari and Adil Rahmathulla. PGIM Real Estate Capital VII is slated to receive $125 million. The fund was formed to take advantage of the opportunity for suppliers of junior debt and preferred capital in the European real estate market. PSERS previously committed $581 million across five PGIM Real Estate vehicles and currently has $265 million of NAV exposure to PGIM Real Estate. Within the private equity portfolio, three firms -- LLR, Clearlake Capital Group and New Mountain Capital -- were selected to oversee a total of $450 million. LLR Equity Partners VI will receive a $200 million commitment from the pension fund, which will gain exposure to the Philadelphia-based firms lower middle-market growth strategy. Since its 1999 inception, the firm has raised and managed nearly $3.6 billion in capital dedicated to growth equity opportunities through five private funds. Clearlake, meanwhile, will manage $75 million in Clearlake Flagship Plus Partners, the fifth Clearlake fund investment for PSERS. Clearlake said that it anticipates raising approximately $1 billion to $1.5 billion in capital commitment and seeks to generate attractive risk-adjusted returns by investing both alongside the Clearlake Capital Partners and Credit Opportunities Partners strategies in larger transactions, and on its own in other tactical or special situations opportunities. These distressed and special situations investments will span the entire capital structure across both private and public markets, including credit and equity. New Mountain will handle $175 million for PSERS through its Fund VI, which is targeting commitments of $8 billion. The firm will invest in direct privately negotiated equity and equity-related investments in its mid-market buyout strategy. According to a memo to trustees, New Mountain has raised over $17.7 billion of committed capital across five private equity funds since inception. Additionally, New Mountain is currently raising New Mountain Strategic Equity Fund I, L.P., targeting $750 million of commitments. The Strategic Equity Fund seeks significant long-term capital appreciation typically targeting direct privately negotiated equity and equity-related investments using the same overall investment philosophy, while focusing on non-control investments.

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