San Diego City pension lifts three-year PE pacing target

San Diego City Employees’ Retirement System plans to commit $550 million to private equity over the next three years through its separate account with GCM Grosvenor, nearly half again as much as last year’s target of $375 million.

SDCERS’s board at its Sept. 14 meeting approved a PE-pacing plan for GCM Grosvenor, which manages half the system’s PE and infrastructure portfolios.

The retirement system has allocation targets of 10 percent for PE and 3 percent for infrastructure, and it divides management of those portfolios between GCM Grosvenor and StepStone Group.

SDCERS said the GCM Grosvenor increase over last year was needed to keep close to the allocation target. The new plan would put SDCERS on the same pace it pursued in 2014 and 2015, when it was ramping up to meet a 5 percent PE target that was approved in 2013.

GCM Grosvenor’s mandate targets investments in funds with higher risk-adjusted-return potential, J-curve-mitigating strategies and co-investments. The mandate also includes focus on small and emerging managers, middle-market buyouts, co-investments and subordinated debt, SDCERS Investment Officer Jamie Hamrick said.

SDCERS’s PE investing slowed in 2016, 2017 and 2018 as it neared its target and as market volatility ultimately reduced the overall value of SDCERS’s portfolio, meeting materials show.

Strong public-market performance has since boosted SDCERS’s total portfolio, and that growth requires an increased pace of private-markets commitments, according to GCM Grosvenor.

The one-year pacing target is a substantial increase over SDCERS’s 2018 pace for the portfolio.

GCM Grosvenor committed $100 million over the past 12 months to nine new investments, including three funds, six co-investments and two follow-on commitments. The fiscal year that begins in October will have a pacing target of $175 million.

“The investment pacing that GCM Grosvenor expects to do for this [coming] year is” about $175 million, “split between three to seven fund investments and five to 15 co-investments,” Hamrick said.

GCM Grosvenor said it wanted the PE portfolio to be cash-flow neutral by 2020.

As part of that strategy, it has tried to mitigate the J-curve commonly associated with PE investments by committing to secondaries, seasoned primaries, special-situation funds and both equity and mezzanine co-investments.

All those investments have the potential to more quickly both put capital to work and generate returns for investors, according to the manager.

SDCERS also approved an update to the benchmarks for the PE portfolio, adopting a primary benchmark of the Top 50th percentile of Burgiss PrivateiQ Database.

While that benchmark will measure SDCERS against its peers, it will also use a secondary benchmark that is a weighted composite performance of the Dow Jones U.S. Total Stock Market Index (67 percent weight) and the MSCI ACWI ex USA Index (33 percent weight), plus a 3 percent premium.

Action Item: San Diego City Employees’ Retirement System: www.sdcers.org