The Orange County Employees Retirement System is planning to sell its fund of funds investments on the secondaries market as it shifts towards a more hands-on approach to private equity.
Over the past seven years, the $24.5 billion Californian pension has been expanding its direct PE programme, prioritising commitments to direct funds over fund of funds vehicles. It has been gradually winding down its fund of funds holdings and aims to eliminate the exposure entirely as those vehicles mature, according to a member of its investment staff presenting at OCERS’ board meeting Wednesday.
In recent years, the investment periods of funds of funds have been extended from the typical 10-12 years to 15-18 years due to the covid-19 pandemic and other macroeconomic challenges, chief investment officer Molly Murphy said during the meeting. She described OCERS’ current fund of funds holdings as “too many” and said the pension plans to “push forward with secondary sale activity” to accelerate the wind-down of those vehicles.
“There may be some that we try to execute through the general partner – which is called a GP-led secondary – and there will be some that we will have to execute on our own,” Murphy said. “But that capital has been stuck… it is probably not going to earn as much as our new investments, given the age of the assets that are in those funds.”
OCERS has cut fund of fund-level fees from 117 basis points in 2017 to 46 basis points last year, the staff member said at the meeting.
The pension’s direct PE programme accounted for 70 percent of the total PE net asset value for OCERS as of the end of last year, according to materials prepared for the meeting. “A lot of it is still very early on, but we have started to see early distributions for some of the earlier funds,” the staff member said. “Going forward, the direct programme should be the main driver of returns for the asset class.”
To further cut fees and boost returns, the pension also launched a co-investment programme in 2021, which has since delivered a net internal rate of return of 37 percent and a return multiple of 3x, the staff member added.
At a 2023 board meeting, Murphy said the pension needed to “get closer to the deal” and “stop paying layers upon layers of fees” by building an internal trading team for its public market investments and ramping up co-investment activity in private markets. As part of this effort, OCERS was one of eight institutional LPs backing the launch of venture firm Collective Global in 2023.
The pension faced a severe shortfall in PE distributions last year, Private Equity International reported last November. In the 12 months ending that month, its PE portfolio generated distributions equal to just 6.5 percent of beginning NAV, compared with the roughly 20 percent investors typically expect from their PE portfolios each year.
OCERS had about $4.1 billion allocated to PE as of March, representing 16.8 percent of its total AUM, slightly above the 15 percent target, according to its website.