NYC pension funds bet on private equity for higher returns

Four of New York City's five public employee pension funds are boosting their allocations to illiquid investments like private equity in an effort to hit an annual investment return goal.

Boards of directors for the retirement funds for teachers, police officers, firefighters and civil servants voted late last year to raise the share of assets to be invested in so-called alternative investments — which include hedge funds, private real estate and infrastructure — to a range of 29% to 35%, up from 23% to 29%. The increase, effective immediately, comes about a year after New York state raised the cap on how much of pensions' total assets can be put into alternatives.

"Hopefully we'll have a higher probability of achieving our 7% actuarially assumed rate of return with a lower amount of volatility," said Steve Meier, New York City's chief investment officer, in an interview.

All but one of New York City's funds have decreased investments in equities by 3.5% to 7.5%, only the Board of Education Retirement System kept its equity allocation the same. The $8.6 billion fund for nonteaching school employees also reduced its alternatives allocation by 1 percentage point because it's fully funded and taking less risk, Meier said.

New York City's pension funds have been slower than other major retirement funds in jumping on the alternatives bandwagon. It wasn't until late 2022, that the state raised the cap on major pensions' nontraditional investments to 35%, the first increase since 2006.

On average, the nation's public pensions allocated 34% of assets to alternatives in fiscal 2022, compared with 9% in 2001, according to Public Plans Data, a U.S. public pensions' database. Private equity, which includes funds that borrow money to take over companies, represents almost one-third of the asset class.

So far, investing in private equity has delivered minimal to modest outperformance for the city's pension funds.

Since the late 1990s, the $80.5 billion civil service pension funds' private equity portfolio beat the Russell 3000 stock index by just 0.4% per year, according to city pension records. BERS, which started investing in private equity in the mid-aughts, beat the Russell 3000 by 2.7% as of June 30. None the funds beat the city's performance benchmark — the Russell 3000 index plus 3% per year for the asset class — in that period.

Meier attributed the poor performance partly to bad timing. The city ramped up private equity investments just before the 2008 recession and then paused for two years.

"We over allocated at a point when things were expensive. We didn't allocate anything when they got cheap," Meier said.

New York City's pension funds' private equity performance has improved in recent years, though. Over the last 10 years, returns have exceeded the Russell 3000 by a range of 0.6% to 4.2%.

"The funds' are becoming more selective in hiring fund managers and have been able to negotiate fee discounts because of the funds' combined assets," Meier said. Its five retirement funds have $254 billion assets under management.