Updated with correction
The tide of large pension funds creating strategic alliances with alternatives managers is swelling.
The alliances “are naturally attractive to large institutional investors,” said Mike Moy, a managing director at Pension Consulting Alliance Inc. in Mission Viejo, Calif., citing lower fees and broader investment strategies.
Among the funds that are planning, have created or have increased such relationships recently:
c the $153.7 billion California State Teachers' Retirement System, West Sacramento, whose investment committee is poised to approve a recommendation at its meeting Aug. 2 that would allow the pension fund to enter into customized funds with alternatives managers;
c the $24 billion Texas Permanent School Fund, Austin, in April selected Grosvenor Capital Management LP and Blackstone Alternative Asset Management as strategic relationship managers who, together with internal staff, will co-manage portfolios of direct investments in hedge funds;
c the $72.1 billion New Jersey Division of Investment, Trenton, in December began a $1.5 billion strategic relationship with The Blackstone Group LP;
c the $224.1 billion California Public Employees' Retirement System, Sacramento, in November approved a $500 million strategic partnership with Blackstone; and
c the $109 billion Teacher Retirement System of Texas, Austin, also in November committed $3 billion each to Apollo Global Management LLC and Kohlberg Kravis Robert & Co. LP.
Mr. Moy said the partnerships can react quickly to investment opportunities across asset classes. Plus, pension funds potentially could reduce the number of alternatives managers in their stables, saving fees and manpower monitoring the investments.
“It's a more efficient vehicle,” he said.
For example, officials at Blackstone Group have created a custom fund for New Jersey — the tactical opportunities fund — that will invest across hedge funds, private equity, real estate and commodities in search of time-sensitive or opportunistic investments.
It is the first time Blackstone offered a fund cutting across asset classes, according to David Blitzer, a New York-based senior managing director with the private equity firm.
New Jersey will invest up to $750 million in the tactical opportunities fund and another $750 million in a custom credit fund that will look for opportunistic long and short investments in the below-investment-grade corporate credit markets as well as a variety of credit opportunities involving energy production and distribution, said Timothy Walsh, director of the New Jersey Division of Investment.
He said New Jersey officials approached Blackstone about custom accounts because of the firm's ability to source unique investment opportunities around the world.
“We're trying to buy assets a lot of private equity firms won't touch because they're not, you know, 20% yielders,” Mr. Walsh said.
He said New Jersey would be happy with a 10% to 12% rate of return from assets the funds will be buying, which could range from distressed debt to pipelines.
Mr. Blitzer said Blackstone plans to top New Jersey's expectations, and return 15% to 20%.