The board of the Pennsylvania State Employees’ Retirement System has approved making a $100 million additional placement in the Ardian Secondaries Fund IX L.P. The fund is a large fund of funds, made up of private equity allocations and infrastructure funds. In addition to the $100 million, the pension allocated up to $50 million to a sidecar vehicle that will co-invest alongside the Ardian Secondaries Fund IX.
The board also approved a follow-on investment of $75 million in the Oak Street Real Estate Capital Fund VI L.P., a single tenant net-lease properties fund. The board also voted to investigate active management in their U.S. fixed-income portfolio. The $38 billion fund, which has over $2 billion of net assets invested in U.S. core fixed income, will explore investment managers for this policy update.
The fund’s investment staff also presented proposed schedules for upcoming consultant searches. The staff plans to begin the request for information process to select the next real estate consultant in mid-March 2023 and the general investment consultant in mid-May 2023. The current contract with NEPC, LLC for real estate consulting services will expire on December 1, 2023, and the current contract with Callan, LLC for general investment consulting services will expire on February 26, 2024.
Outside of investment-related business, the board approved the proposed fiscal year 2023 to 2024 budget for the investment fund, the defined contribution plan, the administration budget and the commonwealth employees deferred state compensation budget.
The board also approved the stress test and risk assessment reports prepared by Korn Ferry, the system’s actuary. Stress testing considers many scenarios and the worst case of such circumstances. The 2022 report found that the plan was in a more favorable position when compared to its 2021 report. The 2022 report concluded that Pennsylvania SERS will be able to pay out benefits in the case of recession, or in an extended market downturn scenario. In addition, the 2022 report projected lower employer contribution rates and higher funding ratios in 2022 than in the 2021 assessment.
Consultant Callan provided an update on the current economic climate and capital markets.
The presentation discussed that gross domestic product dropped for two consecutive quarters—the first and second of this year—which according to the Callan presenters does not constitute a recession. The presentation emphasized a quote from the National Bureau of Economic Research that defines a recession as “a significant decline in economic activity that is spread across the economy that lasts more than a few months.”
Callan finished their presentation with a broad overview defining environmental, social and governance investing. Callan research disclosed that there were more than 200 private equity funds founded from 2019 to 2021 to address impact and ESG investing. Of all impact and ESG investments, 10% to 15% are in the real estate sector. According to the firm, real estate investments create impact by creating affordable housing and address sustainability via approaches by which buildings reduce their use of energy and water, as well as their greenhouse gas emissions.
Following the presentation, board members discussed whether the board and the pension itself should be focused on creating social impact with their investments. One member pointed out that this could be a disservice to state employees because the primary fiduciary responsibility of the plan is to provide the best possible returns. Furthermore, the board clarified in debate that the social ‘impacts’ made by any investment may be ‘impacts’ that contribute to areas and projects domiciled outside of the state, or of any interest to plan participants.
Tags: Callan, Co-investing, ESG, Infrastructure, Penn SERS, Pennsylvania State Employees’ Retirement System Board, Private Equity