SACRAMENTO, Calif. -- In a major shift of responsibility, staff at CalSTRS now may commit up to $400 million to alternative investment deals without trustee approval.
Such delegation of discretion is uncommon at public pension funds, and comes at a time when many trustees are wary of a super-heated U.S. buyout market.
Patrick Mitchell, chief investment officer for the $88 billion California State Teachers' Retirement System, and his staff won the authority following CalSTRS' adoption of new policies on alternative investments.
Among the few funds giving investment discretion to staff is the $82 billion Florida State Board of Administration, Tallahassee. Tom Herndon, executive director, has had authority to invest similar or larger amounts in alternatives and other asset classes without board approval, said fund spokeswoman Elizabeth Mozley. She said Mr. Herndon keeps Florida trustees informed of his investment decisions.
At the $140 billion California Public Employees' Retirement System, Sacramento, the fund's senior investment officer -- Barry Gonder -- may approve coinvestments up to $75 million, said Brad Pacheco, fund spokesman. (In coinvesting, a pension fund invests alongside a partnership as well as, typically, in the partnership itself.)
But investment committee approval is needed for CalPERS' partnership commitments unless the committee makes a specific exception.
Also, the $6.6 billion Los Angeles City Employees' Retirement System board is considering giving its alternative investment consultant -- Pathway Capital Management, Irvine, Calif. -- full discretion in such investments. CalSTRS also uses Pathway.
In general, however, public fund trustees give their staffs little or no authority to commit to alternative investment partnerships without trustee approval.
But that might be changing, in large part because public fund staff members increasingly are telling their boards the pension funds have been shut out of deals or miss first closings in the hot alternatives market because trustees have been too slow to approve commitments. Staffs made similar complaints about real estate investment in the then-hot real estate market in the late 1980s.
James Mosman, CalSTRS' chief executive officer, said giving the staff authority to make some alternative investment decisions also is needed so the fund's board can concentrate on larger issues.
Mr. Mitchell said getting in early is an advantage because early investors in a partnership can help set terms and conditions, including fee structures and advisory board seats.
In addition, he said, CalSTRS can make larger commitments to some of the best partnerships, which now are often oversubscribed.
Mr. Mosman noted alternatives represent only 2% of the fund's assets, yet the board sometimes spends several hours discussing what is a very small part of the overall portfolio.
Under Mr. Mitchell's new authority, he may make a commitment -- up to $400 million or 20% of the capitalization of a partnership -- without board approval.
The $400 million figure would apply only to partnerships of general partners with whom the fund already has a successful relationship.
On new partnerships, Mr. Mitchell now has the power to make a $100 million commitment or 20% of the fund's capitalization.
For coinvestments, the CalSTRS staff may commit up to $50 million or 30% of the capitalization; for secondary limited partnerships, staff may commit $50 million or 20%, whichever is less.
Under the new structure, Mr. Mitchell said, he must get a positive response to a partnership investment from Pathway and an internal staff committee before an investment can be made. He also will inform the board of his decisions on partnerships investments shortly after they are made.
Mr. Mitchell said his staff's authority to invest up to $400 million of fund assets would only be for the "top two tiers" of the general partners with which the fund now invests. He said the fund has four tiers.
CalSTRS' alternative investments include leveraged buyouts, venture capital, distressed debt, mezzanine financing and natural resources, such as oil and gas, timberland and farmland.