A multiple choice option for smaller LPs

The decision by a $9bn California retirement plan to commit money to Kayne Anderson for credit, real estate and equity is a departure from the norm.

Hiring general partners to manage multiple asset classes was once thought of as a practice reserved for larger limited partners that could commit hefty sums to alternative asset managers.

An example came last month with KKR reported to be nearing a deal that would allocate $3 billion on behalf of New York City’s pension system. Additionally, the Teachers’ Retirement System of Texas, which manages more than $140 billion, has committed $5 billion each to Apollo Global Management and KKR.

But targeting multiple asset classes is no longer the purview solely of investors that can write 10-digit cheques.

San Bernardino County Employees’ Retirement Association, which manages a relatively modest $9 billion pension fund, made the decision to set aside $150 million to let Kayne Anderson invest in four separate credit strategies along with energy private equity, real estate private equity and growth equity.

Other smaller LPs may view SBCERA’s move favorably, seeing it as a means to consolidate their number of GP relationships within the private credit space.

Almost 60 percent of investors in North American private debt say they are planning to reduce the number of GP relationships they have over the next 12 months, according to PDI data. Less than 40 percent want to increase the number.

LPs feel differently about other asset classes, according to the survey. In private equity, real estate and infrastructure, the percentage of LPs wanting to reduce the number of relationships is much lower. In private equity, only about 15 percent want to do so.

This could change, however, if separately managed accounts with mandates to span asset classes become more commonplace.

The compliance process could be streamlined if only a couple of managers oversaw an LP’s entire alternative asset class exposure rather than having multiple managers for each strategy. It’s not hard to picture this consolidation preference looking attractive to other asset classes as well.

SBCERA also clearly had fees on its mind when making the commitment. “The [account] will provide SBCERA a lower cost and more efficient way to gain access to Kayne Anderson’s existing products, new products and best ideas,” consultants at NEPC wrote in a note to the pension.

Making commitments to managers that are larger than typical commingled fund allocations allows LPs to negotiate better fees. The Public Employees’ Retirement Association of New Mexico, which manages $15 billion, did just that when it set up a $200 million direct lending SMA with Tennenbaum Capital Partners in October.

PERA negotiated a 1 percent management fee on invested capital rather than a 2 percent fee on committed capital, as is the case for some private funds, one pension fund staffer noted according to the meeting minutes.

To put PERA’s size relative to some of the public pension fund giants into perspective, it’s unfunded liability is $4.8 billion, meaning Texas TRS committed more each to KKR and Apollo than PERA’s unfunded liability.

Of course, we still have to see how SBCERA’s decision to invest with Kayne Anderson plays out. Some peers may be wary about committing too much to a single manager – perhaps feeling that the benefits of strategic diversification are outweighed by the risks of manager overexposure. Nonetheless, the pension fund may well have given smaller investors food for thought.