Pandemic drives faster transition for Virginia to private markets

For the $82 billion Virginia Retirement System, Richmond, the COVID-19 pandemic hit home by picking up the pace of a planned multiyear transition into private markets from public ones.

Already convinced that private markets are more advantageous than public ones in a risk/return sense, Virginia investment officials are maintaining the same risk profile, but "with the market declining so fast, we kind of jumped a year," said Ronald D. Schmitz, chief investment officer.

"Our plan was to decrease public equity exposure in two steps. The market decline in March and early April brought us to our target early. ... The market kind of did for us what we were going to try to do, and saved us the transaction cost," Mr. Schmitz said.

Selling on the rebound allowed them to naturally reallocate to the new long-term targets, and they have been selling to stay in balance with the benchmark weights. "In effect, we have been selling the actual portfolio high," Mr. Schmitz said.

Today, Virginia's new long-term targets are 34% public equity; 15% fixed income; 14% each credit strategies, real assets and private equity; 6% multiasset public strategies, or MAPS; and 3% private investment partnerships, or PIPs.

The fiscal year 2020 and 2021 targets were 40% and 37% equities, respectively, and 34% long term, with the balance going to MAPS, PIP and private equity.

Virginia started on its private markets transition more than eight years ago, when it had no more than 8% exposure each to real estate and private equity. An initial study calling for 15% real assets and 12% private equity landed at 14% today, to allow for the PIP and MAPS allocations to be proportional to the fund's allocations to public and private assets.

"We are not doing anything drastic. I am more comfortable being in private markets," said Mr. Schmitz, the former CIO of the $76.8 billion Oregon Public Employees Retirement Fund, Salem, and the Illinois State Board of Investment, Chicago, which oversees $19 billion in defined benefit plan assets.

While PIP is performing well, MAPS is still unseasoned, Mr. Schmitz said. "We are being fairly cautious on the multiasset portfolio implementation. We still think of it as a toe in the water thing, and we are getting a ton of information. Both the public and private portions are strategic relationships, which involved a lot of data flow and data exchange from the managers."

During the COVID-19 pandemic, that exchange has been an adjustment. "In the short term, it is harder for managers to work with us. We placed the hurdle a little higher," Mr. Schmitz said. "In spirit, our process is the same. Pre-COVID, manager meetings were normally done in person. Now with COVID, manager meetings are electronic. Everyone is adjusting to communicating this new way."Still he said, "our manager activity has been pretty robust." As their credit strategies portfolio moves to all private, most of that has been with existing managers. "We do our due diligence; we just have to do it a little differently. You kind of miss out of a little bit of the culture," he said, but there are also gains. "We end up having six sets of eyes vs. two being on-site. You give up a little, you gain a little. I wouldn't say it's perfect, but it's far better than any of us expected."

While telework is working out so far, traveling to check out assets like real estate is another matter. "At some point, we are going to have to hit the road," Mr. Schmitz said. Virtual conferences with the board and investment advisory committee members is proving to be a plus. "It's much easier to have a phone call. We might do more impromptu meetings like that," he said.

VRS officials had already experienced a physical shutdown when Richmond city streets were closed for an international bike race in 2015, "so it really wasn't much of a stretch when COVID came along," spokeswoman Jeanne L. Chenault said. "It really happened overnight, but we were all prepared."

Mr. Schmitz expects the post-COVID-19 market recovery to look similar to the post-2008 recession, with some parts of the economy doing well and some losing. With anticipated ripple effects from increased bankruptcies and depressed state tax revenues, Mr. Schmitz said. "I am a little more cautious than I was coming out of the (2008 financial) crisis."