In a move to improve the liquidity of the $2.6 billion Chicago Policemen's Annuity & Benefit Fund, the pension fund's board of trustees authorized internal investment staff to get out of private equity.
The portfolio of private equity funds of funds was sold on the secondary market at the end of 2017 with the assistance of investment bank Evercore Group, said Aoifinn Devitt, the pension fund's chief investment officer.
Ms. Devitt said she could not disclose the buyers due to confidentiality agreements.
At the time of the sale, funds-of-funds managers running the pension fund's private equity allocation — which had a net asset value of about $80 million — were Adams Street Partners, Invesco, Mesirow Financial Private Equity, Muller & Monroe Asset Management and RCP Advisors, showed a performance report from NEPC, the pension fund's investment consultant.
Ms. Devitt said the pension fund hadn't committed new assets to private equity since 2009 and the portfolio was "frozen in time" and in harvest mode.
Essentially, the pension fund switched to private credit from private equity to provide more cash flow for the fund, Ms. Devitt said.
"The private equity portfolio was pretty diversified, but we decided that given our liquidity profile, private credit was much more appealing with shorter lockups, a current cash coupon and a mitigated J-curve," Ms. Devitt said.
The pension fund has negative cash flow of about 5% per year, which necessitates that the fund meet its 7.25% assumed rate of return every year to meet annual benefit payments. Regular cash flow from private credit investments is important to the pension fund's ability to cover regular benefit outflows, Ms. Devitt said.
The funded status as of Dec. 31, 2016, was 22.3%, according to the fund's most recent financial statement.
Over the past 18 months, Ms. Devitt and her investment team committed a total of $131 million to eight private credit managers.
In addition, "we're being open-minded and looking at a wide range of substitutes to private equity," she said.
For example, the pension fund is currently searching for active managers to run $50 million in global or microcap equities, which was motivated in part to capture some of the correlations this investment strategy has with private equity, she said.
For the time being, the pension fund's 7% target allocation to private equity will remain unfilled, Ms. Devitt added.
The pension fund's investment team will be rebalancing other strategies, however, particularly the fund's public equity allocation, which has swelled to 57% of plan assets and will be scaled down to the 42% target, Ms. Devitt said.
Public equity helped the pension fund's net return reach 17% in the year ended Dec. 31 and an annualized 7.5% for the three-year period and 8.6% over five years.