A notable restructuring is taking place at the Policemen’s Annuity and Benefit Fund of Chicago, a $2.5 billion pension fund. Under review is the pension fund’s private equity allocation, which stands at $121 million – 4.8 percent of the total portfolio.
The PABF recently issued a request for proposal for a secondaries broker to begin selling down the private equity allocation. Chief investment officer Aoifinn Devitt explains that the allocation is a mix of old commitments and has low return expectations, which is prompting the rethink.
She says: “This portfolio consists of a number of fund of funds positions that are largely in harvest or run-off mode. There are many much older vintages and tail-ends there, too.
“We have modelled what kind of IRR we can expect from this portfolio going forward and it is in low single digits. Therefore, there is considerable opportunity cost in holding it. We are concerned that the fees are so high for such a low expected return.”
Devitt joined the pension fund just over a year ago, so an adjustment is perhaps not the most surprising of moves. She tells PDI that attention is now turning to private debt, with the scheme in the process of quadrupling its exposure – from 2 percent to 8 percent.
“We have recently increased our target for private debt to 8 percent. However, we have mostly earmarked funds to get to this allocation. We will see whether we manage to execute a sale and, according to our cash position and needs at that time, will consider how to redeploy it.
“We are considering secondary private equity investments as well as further allocations to private credit and real assets.”
At the end of March, the PABF approved $10 million commitments to private debt strategies managed by Brookfield and Sound Mark Partners.
The funds that attract Devitt have cash-generating strategies. With the fund needing to bridge a 5 percent benefit payments gap each year, she says the best way to tackle that is through strategies that throw off cash. “When we look at private credit we like investments that deliver a coupon. We much prefer those to strategies where the interest is reinvested.”
Additionally, the mid-market is currently looking attractive. Leverage multiples remain stable and the lower end has been immune to some of the pressures on pricing seen at the higher end of the market. “Managers are getting very attractive yields,” she says.
For Devitt, the most important question for any debt manager is how they handle themselves when things go wrong and demonstrate how they worked to salvage value through the transaction.
It’s an important factor in increasingly difficult times in the credit markets. Private debt is still in its early stages and making that switch from private equity can appear something of a gamble on a nascent market – albeit a compelling solution when fees are high and returns low.