SCERS considers private equity fund-of-funds exposure

SCERS's staff, along with Cliffwater (the scheme's alternative assets consultant), supported a motion to invest in a small/lower-mid-market buyout fund-of-funds to complement its private equity portfolio. They contemplated an overall commitment of up to $100m in primary and secondary funds, as well as in co-investments at the September board meeting.

The board highlighted the benefit of using a specialist small/lower-mid-market fund-of-funds manager to avoid concentrated allocations within the scheme's direct private equity investments. The selected fund-of-funds manager would need to have expertise and track record of allocating to top-performing funds.

However, using a fund-of-funds manager results in an extra layer of fees and carried interest, along with the fees and carried interest charged by the underlying GPs in the fund-of-funds portfolio. The board considered the need for this to be offset by the differentiation of the fund-of-funds, and its ability to achieve outsized returns.

SCERS appointed Cliffwater in 2011 as part of its plan to build its direct private equity portfolio, by shifting from using private equity funds-of-funds to investing directly in private equity limited partnerships. The pension scheme has only invested directly in private equity since then, and has established relationships with 18 GPs, and has invested across 42 funds.

SCERS currently has 8.2% of its portfolio allocated to private equity as of June 2018. Its target allocation is 9%. The PE portfolio includes several asset classes including buyout, distressed debt, venture capital and "other" strategies that do not fall under these categories.

The pension scheme has recently committed $40m to Paine Schwartz Food Chain Fund V. It has previously committed $20m to Marlin Equity Partners V, $35m to Summit Partners Europe Growth Equity Fund II, and $50m to HarbourVest International Private Equity Partners VIII.

The California-based pension scheme has allocated 18% of its private equity portfolio to western Europe, as of September 2017.

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• LPs
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