San Francisco City & County Employees' Retirement System plans to increase its overall allocation to alternative co-investments to 20% from less than 5% over the next 10 years.
The $27.2 billion pension fund's board on Wednesday approved a 10-year strategic plan for its investment division recommended by CIO William J. Coaker Jr. and four managing directors, said Darlene Armanino, executive assistant and board secretary, an email.
The new plan is the result of what the five investment staff members who make up SFERS' portfolio management group call an "inflection point" for the pension fund: Assets have increased from $19 billion in 2014, the number of investment funds has increased to 526 today from 248 in 2009, SFERS' liabilities will grow to $60 billion by 2038 and because of the pension fund's emphasis on alternative investments, "the managers we seek are usually unique, niche investments or specialists, involving smaller funds where available capital is scarce," said a memo from the portfolio management group to the board.
The plan calls for maintaining its current approach to manager selections, investing larger amounts with existing general partners and gradually increasing co-investments to 20% of assets over the next 10 years because they offer "significantly lower fees and potentially higher returns" and are a "natural extension of our existing external manager relationships," according to a presentation from the portfolio management group.
Because building the co-investment program to 20% over 10 years would require annual commitments of $500 million, or 2% of overall assets, for each of the next 10 years, the portfolio management group recommended adding more investment staff and also delegating additional investment authority to the staff.
Part of the plan includes adding seven additional investment professionals to the existing investment staff, up to a total of 30 by the end of fiscal year 2022, and the doubling of administration and operations staff to six by that time from the current three.
According to the presentation, the total savings from reductions of fees paid to external managers over the 10-year period will be $202.5 million.
As of Dec. 31, SFERS' actual allocation was 35% public equities, 21% private equity, 15.6% real assets, 13.6% absolute return, 8.5% fixed income, 3.9% private credit and 2.4% cash.