Pennsylvania pension approves $75m private equity allocation

The board of the Pennsylvania State Employees’ Retirement System (SERS) approved an allocation of up to $75 million in two private equity funds with distinct software and technology strategies.

A $50 million commitment to Thoma Bravo Fund XIV is a follow-on investment for trustees, while a $25 million investment to Thoma Bravo Discover Fund III is a new allocation to the firm. The commitments target investments in application and infrastructure software and technology-enabled services business in North America.

“Thoma Bravo is a leading manager in the software industry,” explained SERS CIO Seth Kelly. “Their investment process and accompanying performance, coupled with the firm’s dedication to transparency makes them an excellent partner for SERS’ members retirement security.”

Consultant StepStone Group recommended the investments in the funds citing Thoma Bravo’s strong quartile ranking against its private equity competitors.

The Thoma Bravo commitment is a 2020 vintage allocation in the SERS private equity asset class and buyout sub-asset class.

As of June 30, 2020, SERS’ market value of Buyout investments was approximately 65.1% of the Core Private Equity portfolio. This commitment aligns with SERS’ Strategic Investment Plan initiatives of making fewer commitments to top-tier managers. SERS is targeting this commitment of up to $75 million, or 13.6% of the 2020 strategic plan pacing budget for private equity. This commitment also reflects a position size of approximately 2.3% within the Core Private Equity portfolio.

The board of the $30 billion pension fund also directed staff to rebalance public market assets over time so that they align with the board approved target ranges at its September meeting. The work involves redeeming approximately $380 million from equity and TIPS investments, while contributing approximately $780 million to the core fixed income and US Treasuries portfolios. This rebalancing action will bring the portfolio in line with the board-approved asset allocation.

Within alternatives, the pension system has allocations to real estate, private credit and private equity.  Each of those asset classes had negative returns in the first half of 2020. Private equity was the worst performer with losses of -5.59% for the six months ending June 30, 2020. Private credit returned -2.36% over the same time frame, while real estate was down -2.32%.

“While the uncertainty around COVID-19 hit investment markets hard late in the first quarter, the strong second quarter returns are working to restore the fund toward its pre-COVID level,” said Kelly. “Early estimates show the trend of improvement continued through August.” Overall, through June the entire investment portfolio was down by -4%.

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