Whoa, South Carolina fund told

The South Carolina Retirement System's plan to create an external firm to manage the $24 billion system's illiquid assets is expected to be delayed on the recommendation of Gov. Mark Sanford and other top state executives and legislators who want a more thorough review of the proposal.

During a Sept. 29 meeting, the five members of the state Budget and Control Board, including Mr. Sanford, unanimously approved a motion by Converse Chellis III, state treasurer, calling for the South Carolina Retirement System Investment Commission to delay development of the firm, now referred to as Devco, and to rescind its previous approval to create the firm as early as Oct. 1.

“It could be the greatest plan since sliced bologna, but we need more sets of eyes looking at it and a more comprehensive review before we move forward with it,” said Scott Malyerck, deputy state treasurer.

“I would be shocked if we didn't slow the process down,” said Allen R. Gillespie, commission chairman, adding that the Columbia-based commission would consider its “next steps” at a special meeting within the next several weeks.

“It would be unrealistic to say that there's not a lot of opposition at this point, but I'm not sure that (opposition) is permanent. They weren't asking us necessarily to pull the plug; they were asking us to slow down and provide more information,” he said.

“Clearly, there is not consensus at this time, and it would be irresponsible of us to push forward without building the proper consensus.”

The control board — whose membership is made up of the governor, the state treasurer, the comptroller general, the chairman of the state Senate Finance Committee, and the chairman of the state House Ways & Means Committee — serves as the retirement system's trustee. The control board appoints the members of the investment commission, which oversees the fund's investments. Mr. Chellis, the state treasurer, also serves on the commission.

The idea for Devco was first discussed formally by the commission at a retreat in May, at which Robert L. Borden, the commission's CEO, made a presentation on the proposal. Mr. Gillespie said. (Mr. Borden did not return telephone calls by deadline.) A motion to roll out Devco as soon as the beginning of October was adopted unanimously by the commission's five voting members — including Mr. Chellis — on Sept. 23.

But Mr. Malyerck said that Mr. Chellis subsequently decided the plan was possibly moving too quickly and that too few details were available. “He wanted to put it on hold until the idea could be fully vetted, not only by the Investment Commission, but by the General Assembly, the Budget and Control Board, and the attorney general,” Mr. Malyerck wrote in an e-mail response to questions.

It was the speed with which the proposal was moving that gave other control board members pause, too, Mr. Malyerck said. “They (control board members) were not against the idea; they were concerned about the speed at which this was moving down the track.”

Benjamin Fox, the governor's spokesman, said, “The governor agreed with the treasurer and the rest of the board that this investment scheme needs further explanation and a more transparent process going forward.”

The idea for the investment management firm, which would be wholly owned by the $24 billion system, came from system officials' desire to cut costs and “mitigate certain risks associated with illiquid asset classes,” including those associated with the fund's $960 million private equity and real estate portfolios, some of which could be moved to the new company, Mr. Gillespie said.

The firm, which would manage some assets internally as well as oversee some external managers, could save the pension plan at least 25% in private equity costs through reduced fees, Mr. Gillespie said, even with the associated costs of hiring a staff.

Along with approving the creation of Devco, the commission also had OK'd $15 million in startup funding for the business, which was to be launched “on or after Oct. 1,” Mr. Gillespie said.

Mr. Gillespie also said the system's current target asset allocation calls for up to 20% of plan assets to be invested in illiquid assets, including private equity, opportunistic credit and real estate. (As of March 31, the fund had 3.4% in private equity, 9.2% in opportunistic credit and 0.6% in real estate, according to the most recent quarterly financial report available on the commission's website.) The commission had not determined how much of those assets would be managed by Devco, Mr. Gillespie added.

Critics of the plan say the proposal could raise the level of risks for the pension fund.

“The downside in private equities is you stand a chance of losing 100% of your investment,” state Sen. W. Greg Ryberg, chairman of the South Carolina Senate Labor, Commerce and Industry Committee, said in an interview.

In a separate interview, Mr. Gillespie responded, “What's driving us is we were already in private equity. The question was, is there a better way to do it?”

Mr. Ryberg said that in the typical hedge fund or private equity investment, the fund managers have their own money invested and at risk. “In Devco, the people doing the investing have no exposure,” he said. “The only exposure is to the taxpayer.”

Another concern for Mr. Ryberg is that Devco could become a state-funded “executive apprentice program” for managers. “They can pull out all of the people we have trained and they can set up their own firm and then they control it, not the state,” Mr. Ryberg said.

He also thinks that management personnel at Devco would hold too much power: “These people (working at the fund) can just threaten to leave if they don't get their way.”

If created, Devco would be the first time a U.S.-based public fund has created a wholly owned external manager, Mr. Gillespie said.