The $9.6 billion Rhode Island Employees' Retirement System, Providence, plans to consolidate private equity and opportunistic private credit investments, according to a memo from a March 24 meeting of the Rhode Island State Investment Commission.
The memo on staff recommendations for strategic asset allocation said that making the change would allow for deploying capital "periodically as market conditions or manager availability permit, rather than through a consistent annual pacing plan." The current targets for private equity and opportunistic private credit are 11.25% and 1.5%, falling under the category of private growth. The new combined target is 12.5%.
Merging the two allocations would allow for pursuing the strategies "in a more opportunistic manner and avoid potentially weak vintages during economic expansion periods," the memo said.
A spokeswoman confirmed that the changes were approved at the March meeting.
In the income category, investment staff recommended eliminating a 1% REIT allocation and a 1% allocation to master limited partnerships, adding a 2% target for collateralized loan obligations.
"Eliminating these small allocations to MLPs and REITs would free up capital to invest in more strategically prudent yield assets with lower expected volatility and equity beta," the staff memo said. The new CLO exposure would mainly target the mezzanine and equity tranches and diversify the asset class, "and improve its expected return on both an absolute and risk adjusted basis."
For the inflation protection bucket, staff called for eliminating a 2% allocation to TIPS and increasing allocations for core real estate to 4% from 3.6% and private real assets to 4% from 2.4%.
The memo noted that a strategic asset allocation study implemented after a 2016 asset/liability study "has achieved its portfolio objectives while outperforming its benchmarks."
"With low yields, subdued return expectations, and uncertainty surrounding the future economic impact of the pandemic, staff and NEPC believe that it is prudent for the SIC to consider additional SAA adjustments, at the margin, that will enhance expected return on both an absolute and risk adjusted basis and improve the portfolio's ability to meet its objectives," the memo said.