NYC Pensions May Sell, Consolidate Private Equity Holdings

(July 19, 2011) – Despite recent positive news regarding private equity fundraising and some extremely profitable deals for select asset owners, New York City’s pension plans may be looking to dump a $2 billion portfolio of buyout funds to consolidate their private-equity relationships.

According to Bloomberg, the combined funds of the New York system had 108 private-equity managers as of June 2010. This figure is likely to shrink if the sale is successful – an action that would also increase inventory in the secondary private-equity market due to its size. New York’s tentative plan is to concentrate bets with a smaller number of better-performing managers, the news service reported.

Although the specific details of the deal remain unclear, at least one of the City’s five pension plans is reportedly mulling a sale of its private equity holdings managed by Clayton, Dubilier & Rice and Silver Lake Management.

As of April 30, private equity accounted for about 6% of the $122.4 billion in assets for New York’s pension funds. As a group, the system has gained more than 20% in fiscal 2011, according to Comptroller John Liu, a likely Mayoral candidate in the next City election. Meanwhile, the private-equity portfolio of New York City’s civil employees pension fund returned a total of 12.5% since inception and 7.06% over five years ended March 31.

Despite the positive returns, conflict has surrounded asset allocation at the City’s pension system. Recently, Deputy Mayor Robert Steel claimed that the pensions were over-weighted in US stocks and bonds and should invest more heavily in other assets such as US Treasuries. Steel’s public comments indicate his dissatisfaction with Comptroller Liu’s oversight of the city pension funds. In a speech before the Citizens Budget Commission, he minimized Liu’s recent assertions that the City’s five funds had achieved a 20% return over the last fiscal year. “In fact, over this same period, when we earned 20%, the S&P was up over 30%,” Steel said, according to the New York Post. “So while 20% is an attractive number, when you compare it to what we should or would want to be achieving, it certainly seems to be a little bit light.”

aiCIO recently investigated New York City’s underfunded pension system, revealing further tension between Mayor Michael Bloomberg and Comptroller Liu. While Liu is responsible for overseeing New York City’s pension management, Bloomberg hired the City’s first chief investment advisor last year and brought on another senior professional to help run the system’s five pension boards. Insiders claim that Bloomberg favors greater attention to risk management and asset allocation, with less emphasis on selecting asset managers, which is primarily Liu’s domain.

Regardless of political tension, the planned secondary-market private-equity sale comes despite positive news for the private equity industry as a whole, whose strong fund-raising puts it on pace to eclipse last year’s levels, with U.S. and European funds respectively collecting 35% and 48% more in capital committed over what was raised in the first half of 2010. Anecdotally, asset owners have increasingly been benefiting from this asset class, the sale of internet-communications firm Skype by Silver Lake Management and the Canadian Pension Plan being the foremost example.