Chief investment officers of pension plans from New York, Wisconsin and Texas remain bullish on investing in private markets, but are increasingly scrutinizing the fees that managers charge.
“I’m concerned about the level of fees we do pay in private equity, infrastructure, in real estate, private credit. We need to be very sensitive around fees,” said Steven Meier, CIO and deputy comptroller of the New York City Retirement Systems, which manages $294 billion across five pension funds, speaking at the Bloomberg Invest conference in New York on March 5.
“We’re trying to develop metrics that actually can look at the alpha generated per unit of fee.”
Meier said the system’s alternatives allocation is set to grow from 25% to 35%.
“It's been an advantage at a time when everyone else is pulling back and exits have been harder to come by,” he said. “Performance hasn't been great in private equity. But it is a great time to be putting money to work. We’re able to get better access to the top decile performers, to get size and scale, to negotiate better terms, better economics, and a healthy slug of co-investment as well.”
For the $44 billion Texas Municipal Retirement System, Austin, co-investments are a “critical pillar of our private markets strategy and approach” that allow for building high conviction, idiosyncratic exposures behind the highest conviction ideas, said CIO Yup Kim.
But Kim too highlighted the need to discuss fees.
“The next 15 years is not going to look like the past 15 years… paying yesterday’s fees on tomorrow’s returns will get you to a bad place, right? And so, I do think, many general partners have been very accommodating and very partner oriented in terms of making sure that gross net spread reduces. But I do think it’s incumbent upon limited partners to think very critically and intelligently on how to deliver really thoughtful net returns to our beneficiaries,” he said.
Gaining traction on the fee front hasn’t been the easiest.
“I would say it's been challenging. General partners are very good at divide and conquer,” said Anne-Marie Fink, CIO for private markets and funds alpha at the $162 billion State of Wisconsin Investment Board.
“So the number of times I've had a general partner tell me, ‘well, you’re asking for this term. Nobody else has asked for it.’ I'm like, ‘yeah, but it's good for LPs, so I'm pretty sure they wouldn't be upset if you gave it to us.’ So I do think that it is something that is going to evolve.”
Fink said she remains a believer in private equity and expects it to outperform public equities over the next 10 to 15 years, but cautioned she does not expect the next 10 to 15 years to be as good as the last 10 to 15 years were in private equity.
“So again, we want all of our managers to get very wealthy, but only if we're getting the returns for our beneficiaries,” she said. “So as long as we're aligning those interests, we are happy to work on it. But I think going forward, we are going to all be more discerning about the fees that we’re paying.”
Volatility
All the CIOs are keeping an eye on the current market volatility sparked by the implementation of President Trump’s tariffs.
“We have about 30% in privates on our way to 35%, and the idea there is that we can really see through the volatility and pay less attention to it, because we’re thinking sort of more long term,” Fink said. “And then within our more public portfolio…we’re putting a lot of money with managers that can be very nimble and respond to some of the noise, and move around and take advantage of some of the volatility.”
It is time to prepare for some “situational dislocations” and maybe even “systemic distress” in different pockets of private markets, Kim said.
“I think you have such a large share of venture-backed companies with less than a year of cash runway, you have pockets of distress, obviously in real estate and even in private credit land, you're starting to see some pretty big issues kind of emanate,” he said. “And so I do think it's really difficult to really kind of plunge and really invest in a falling knife type environment, but I think it's really important for everyone, as there's increased geopolitical and macro volatility to kind of prepare.”
