Not all institutional investors have the capital to write the significant checks required to start a separate account, so they have created ways to still reap the benefits of those accounts.
In a collaborative effort to cut fees and gain control over investments, officials at the $11.8 billion Orange County Employees Retirement System, Santa Ana, Calif., spearheaded two joint searches. One RFP for a real asset manager launched in December and another, earlier this year, with other public institutional investors for a private equity fund-of-funds manager.
Pantheon Ventures was chosen as the private equity fund-of-funds manager. A committee made up of chief investment officers from four California public pension funds, including OCERS CIO Girard Miller, launched the collaborative search. Last month, OCERS committed $75 million to Pantheon Ventures and also committed $25 million a year for 2017 and 2018 to Pantheon for a bundled private equity fund of funds that would make pro-cyclical investments in contracting capital markets. OCERS, on behalf of the joint procurement, initially committed $100 million to Pantheon Ventures in May and another $75 million in November. OCERS calls the joint procurement “P4 Network,” which stands for public pension portfolio procurement.
“The private equity procurement that resulted in selection of Pantheon has been satisfactory and successful from our standpoint, which is one of several reasons that Pantheon received the largest allocation for 2015,” Mr. Miller wrote in an e-mailed response to questions.
Along the way, other private equity funds-of-funds managers “dramatically” cut their fees “to remain competitive,” Mr. Miller said.
OCERS estimates the Pantheon fees are roughly 50% of the management costs the pension fund pays its incumbent funds-of-funds managers.
“We at OCERS and our collaborating CIOs believe that the 2014 collaboration has proved the concept and moved the market,” he said.
In a recent presentation to the State Association of County Retirement Systems, an association of 20 California county retirement systems, Mr. Miller suggested that to cut alternative investment managers' fees, one of the things public pension funds could do is create either an informal network that has a purchasing cooperative for midsize and small pension funds or seek performance fee structures with an attractive group discount.