CalSTRS prepares for customised accounts(2)

The pension system, with $144.8bn in assets, is altering its private equity investment policy to allow for investments in separately managed accounts, a model that appears to be gaining popularity among large institutions.

2012 may become the year of the separately managed account in the private equity industry.

The California State Teachers’ Retirement System appears to be getting ready to invest in separately management accounts to take advantage of “discounted fees” and “preferred terms”, according to documents from the pension’s investment staff.

The pension system is updating its private equity investing policy to include allowing investments in separately managed accounts. CalSTRS’ investment committee will discuss the issue at the meeting in February.

The pension system “is now frequently offered separately managed accounts by private equity managers”, investment staff said in the documents.

“A separate managed account requires a general partner to negotiate on a bi-lateral basis with the LP in question and it typically results in discounted fees and preferred terms,” the pension system said.

“In the past, private equity general partners have not felt compelled to offer separately managed accounts. However, the financial crisis of 2008 coupled with other factors (e.g. large influx of sovereign wealth fund investors, etc.) has changed the industry equilibrium.”

It’s not clear if CalSTRS has a manager in mind.

Last year, two big pensions systems formed separately managed account relationships with managers, highlighting the attractiveness of the model for big institutional investors and pointing the way to what is expected to become an industry trend. 

New Jersey’s $69 billion state pensions system formed a customised relationship with The Blackstone Group. The state pension pledged $1.5 billion in separate account commitments to be used for investments across various strategies, including real assets and credit. Also, the Teachers’ Retirement System of Texas formed customised accounts with Kohlberg Kravis Roberts and Apollo Global Management last year. The pension system pledged $3 billion to each manager to be invested across asset classes.

In New Jersey’s case, the pension system expected to save $120 million in fees in the separate accounts over the life of the partnership, compared to investing in traditional funds, according to the pension system.

“We only pay a management fee when we do a deal,” Christine Pastore, head of alternative investments at the pensions system, told Private Equity International in a prior interview. The system was being charged a 1 percent management fee only on invested capital on the separate account funds – known as “tactical opportunities funds”.

The tactical funds pay out 15 percent in carried interest, and the state also has governance rights and greater flexibility than it would have in traditional funds.

“You can’t afford not to consider these types of arrangements if you have the capital and the leverage to do so,” Pastore said. “This appears to be the future of the asset class.”