Penn. Treasurer-Elect has eye on emerging, regional funds

Pennsylvania’s incoming state treasurer says he has no immediate plans to recommend changes in private equity allocations for the state’s two largest pension funds, both of which have suffered steep losses in the past quarter.

However, Treasurer-Elect Rob McCord, a former early stage venture capitalist, says he does expect to put more effort into identifying promising emerging managers, particularly ones hich create jobs in the state.

“If you have a first-time fund by people with a clear and auditable track record, I think a lot of profit can be made, especially by funds that are hungry,” says McCord, a democrat and former managing director at Novitas Capital, (f.k.a. PA Early Stage Ventures), “At the same time, losses can be made by managers that have brand recognition but may be too wealthy to be as motivated.”

McCord says he had “no quarrel” with the alternative asset allocations at the time he was campaigning for the treasurer’s post, and doesn’t come into the job with a fixed view of the perfect weighting of asset classes. However, he says that he had some concerns about “what might be a light overweight to hedge funds.”

Although he believes they have a role, McCord says: “I admit that I’m a little leery of the use of hedge funds.”

He says he plans to double check that they’re not excessively using leverage or introducing unnecessary risk. Additionally, McCord, who takes over the treasurer job in January, says he has no immediate plans to invest more in venture.

Currently, the state’s two largest pension funds—the $55 billion Pennsylvania Public School Employees’ Retirement System (PSERS) and the $29 billion Pennsylvania State Employees’ Retirement System (SERS)—both have significant weighting to alternative assets.

For the end of its fiscal year on June 30, PSERS had $13.8 billion in alternative assets and real estate. As of its last filing, SERS had $10.9 billion in alternative assets, according to Thomson Reuters (publisher of PE Week).

The bulk of investments are in non-venture asset classes, although both pension funds have made commitments to VC funds. Recent investments by SERS include stakes in Battery Ventures, Lightspeed Venture Partners, Ignition Partners and Morgenthaler Venture Partners. Recent PSERS investments include stakes in Quaker BioVentures and StarVest Partners.

Both funds have posted large investment losses in recent quarters. In late November, PSERS posted an investment loss of negative 11.05% for the third quarter, and negative 16.67% for the one-year period ended Sept 30.

SERS reported an investment return of negative 14.4% for the first three quarters of the year, which is about an average performance for a large fund in the current climate.