PSERS to free up another $1B for PE

The Pennsylvania Public School Employees’ Retirement System could soon earmark at least $1 billion of fresh capital for private equity. Managers of distressed debt, secondary and international funds will have an especially good shot at it, although venture funds could also benefit.

With roughly $7 billion already invested in private equity, PSERS is close to hitting its 11% target allocation to the asset class, says Private Markets Director Charles Spiller. He and his boss, Chief Investment Officer Alan Van Noord, plan to recommend that the board of trustees hike the target allocation in a way that creates at least $1 billion in additional private equity investments.

“And we could see it going even a little higher in the long term,” Spiller says.

Like Illinois Teachers’ Retirement System and the Teacher Retirement System of Texas, PSERS would generate the dollars by reducing its commitment to public equities.

“You have to take the money from somewhere,” Spiller says. “We consider private equity and public equity to be, in effect, part of our total equity bucket.” PSERS’ target allocation for its entire equity bucket is 75%, or $50.2 billion, and includes U.S. and international public equities, private equity and real estate.

While PSERS has historically invested mostly in buyout funds, it has made commitments in excess of $250 million to five venture funds in the past two years.

Venture take

In 2007, it committed up to $25 million to The CID Group’s technology-focused CID Greater China Venture Capital Fund II, up to $30 million to the fifth fund from Israel’s Pitango Venture Capital, which invests in tech and life sciences companies, and up to $50 million to the second fund from New York-based digital media and Internet investor StarVest Partners.

In 2006, PSERS made commitments of up to $100 million to the second fund from Philadelphia life sciences investor Quaker BioVentures and up to $62.5 million to the third fund from New York-based life sciences investor Psilos Group.

We could see it going even a little higher in the long term.

Charles Spiller

In its VC investment policy outlined last year, PSERS notes that it is interested in all stages of venture capital, from seed to expansion. Its minimum investment is $25 million and its maximum is no more than 25% of the total fund and no more than 90% of the total if it is the only investor besides the GP. PSERS also demands that general partners put up at least 5% of the committed capital of a fund.

One market segment of particular interest to PSERS is secondaries. With the help of Portfolio Advisors, it is currently studying the market and will likely invest in “a few” secondary funds this year. “You’re buying positions in funds that already exist, so the J-curve is significantly shorter,” Spiller says.

Given the downturn in the economy, PSERS also plans to put more capital to work in distressed-debt funds, to which the pension fund has a 3% target allocation.

On the international front, the pension fund has roughly a quarter of its private equity pot, or $1.8 billion, in funds focused outside the United States, and Spiller would like to see that percentage grow.

Beyond that, PSERS prefers funds with diversified strategies to industry-specific vehicles. And while the pension fund doesn’t reject first-time managers out of hand, Spiller definitely wants to see that a team has worked together for a few years.

During his almost 14 years with the pension fund, Spiller has helped guide the portfolio from its position as a marginal private equity player to a coveted limited partner, and developed a diversified investment strategy along the way. When he was hired, in 1994, the LP had a 2% allocation to private equity. A year later, with Spiller’s encouragement, the board upped it to 5 percent. The allocation jumped to 8% around 1998, and then the tech bubble burst.

“Initially, I’d say we were an opportunistic investor,” Spiller says, explaining that in the early days the LP was growing its program by making significant commitments to the best funds it could access, without an eye toward specific types of funds or strategies. “Today, although we are still opportunistic, we are also more strategic,” he adds.

The LP now has a portfolio of 161 partnerships spread across 82 general partners. “PSERS is extremely happy with the quality of the GP relationships we have,” Spiller said. —Joshua Payne with additional reporting by Lawrence Aragon