The New York City Pension Systems have announced a new emerging managers program and changes to how the pension funds will allocate to alternatives.
At an event held for investment managers and members of the media today in New York on Friday, city comptroller Scott Stringer laid out what he calls a “new open door policy” for the pension system along with a desire to “level the playing field”, bring in a broader range of managers and make more diverse commitments.
The New York City Employee Retirement System will allocate an additional $1 billion to emerging managers in real estate, hedge funds and opportunistic fixed income. That allocation brings the total allocated to emerging managers to more than $14 billion, including nearly $10 billion committed to minority and women-owned business enterprises. With this allocation, and subject to Trustees’ approval, the pension funds would have emerging manager investments in each of its major asset classes. That allocation may mean new opportunities for private equity fund managers involved in mezzanine debt as the city now includes mezzanine in its opportunistic credit basket.
The city is defining emerging managers as having under $2 billion of assets under management or less than a three-year track record. Investment officials will also be keenly focused on investment team diversity and will be seeking out minority and women-owned business enterprises.
“I’m going to be looking closely at the investment teams, if there aren’t women on there, if there isn’t diversity I’m going to ask about it,” said Seema Hingorani, chief investment officer at the Office if the New York City Comptroller and a former investment professional at hedge fund Andor Capital Management. “Diversity is out there. If you’re having trouble finding it, I’ll help.”
As of 31 December 2013, the New York City Pension Funds have emerging manager investments of $5.2 billion in private equity, $5.7 billion in public equity, $1.5 billion in fixed income, $300 million in real estate investment trusts and $271 million in real estate. The city is also working through an update to its graduation policy which requires that the city terminate contracts with managers once they are no longer considered emerging, even if they are successful. Hingorani noted that officials are working through a plan that would allow managers to bid again and continue their relationship with the city if the relationship has been successful to date.
During the event, officials from all investment arenas in the Bureau of Asset Management walked attendees through the totality of the pension portfolio and allocations. New York City is the largest municipal pension system in the world with $152 billion in assets and is 61 percent funded. Previously, portfolio allocations were a 70/30 mix of equities to fixed income. The city recently updated that mix to a 65/35 allocation, reducing equities exposure and increasing exposures to fixed income. This also accounts for an increased exposure to private equity investments, which now account for 6.1 percent of total portfolio allocations. NYCERS has increased total portfolio allocations to alternative asset classes from 11 percent to 21 percent. The pension is capped at a 25 percent total allocation to alternatives, but investment officials are considering raising that cap, Hingorani said.
NYCERS has a $9.1 billion allocation to private equity that is heavily weighted to buyout funds and North American investments. Its current total private equity exposure stands at $17 billion.
Speaking on the future plans for NYCERS private equity allocations, Rafique DeCastro, investment officer for the private equity group, noted that they still have approximately $2 billion to allocate, and based on current pacing to date will be increasing allocations to secondaries, debt, and special situations. The group will hold back on any new allocations to venture capital, as officials say the allocation mix is overweight those funds. Global investment opportunities will also be under greater consideration as managers work to diversify the portfolio on multiple fronts.
So far for the emerging managers program, DeCastro and Alex Doñè, executive director of private equity and emerging mangers for NYCERS, have had 236 meetings with 143 unique general partners and 75 minority and women-owned business enterprises since 2012. Despite having a very lean team , both Doñè and DeCastro expect to maintain that pace for future allocations and will be looking to bring on new hires including a head of private equity.
Currently, the city is working with Hamilton Lane and StepStone Group as consultants for private equity allocations.