Key Takeaways
- • The Pennsylvania State Employees' Retirement System (PennSERS) approved a $130M commitment to Arcline Capital Partners IV LP, plus an additional $20M allocated to a sidecar co-investment vehicle invested in Arcline portfolio companies, according to Markets Group.
- • The Arcline allocation would represent 2.3% of SERS' private equity portfolio and falls within the buyouts sub-class, where buyout investments were approximately 53.4% of the private equity portfolio as of Sept. 30, 2024.
- • Consultant RVK recommended a refocus on private equity, citing elevated but non-crisis volatility, a declining U.S. dollar, and international equities outperforming U.S. equities for the first time in years.
- • EY proposed a robust enterprise risk management framework covering investments, operations, funding, governance, legal and reputational risk, and the board plans to recruit a chief risk officer once it is developed.
- • SERS staff said the Arcline commitment aligns with its Strategic Investment Plan of making fewer but larger commitments to top-tier managers.
Summary
The Pennsylvania State Employees' Retirement System is investing $130M in the Arcline Capital Partners IV LP private equity fund, along with an additional $20M allocated to a sidecar co-investment vehicle that will also invest in Arcline through one or more underlying portfolio companies, according to Markets Group. The pension plan's investment committee approved the allocation during a recent meeting. The commitment sits within the buyouts sub-class and would represent 2.3% of the plan's private equity portfolio. As of Sept. 30, 2024, SERS' market value of buyout investments was approximately 53.4% of its private equity portfolio. Founded in 2018, Arcline focuses on industrial infrastructure, with experience across aerospace and defense, industrial infrastructure, industrial technology, and machinery and aftermarket analysis.
SERS' investment consultant, RVK, recommended the asset allocation, arguing that the current capital markets environment favors a refocus on private equity. Jim Voytko, RVK principal, director of research and senior consultant, said volatility had risen but was not near crisis levels. He also noted that the U.S. dollar is starting to decline and that international stocks are outperforming U.S. stocks for the first time in years, adding that diversification may matter considerably for institutional portfolios this year. SERS staff said the Arcline commitment aligns with the plan's Strategic Investment Plan of making fewer but larger commitments to top-tier managers.
RVK also highlighted fixed income as an increasingly important allocation. Voytko said the Magnificent Seven stocks are beginning to decline slightly in market dominance, and that higher interest rates have kept inflation in check while allowing investors to earn higher yields from longer-dated fixed income. Tony Johnson, an RVK principal and senior consultant, said fixed income is beginning to contribute meaningfully to returns after years of low rates following the global financial crisis, and that it should become a more significant contributor to asset allocation going forward.
Separately, at a board meeting held earlier this month, SERS' consultant EY presented a proposal for a robust risk management framework to identify systemic risks across the plan's investments, operations, funding, governance, legal and reputational channels. Dan Bender, EY managing director, said the process is ongoing and perpetual rather than tied to the life of a single fund. Risks identified included auditing third-party service providers and their policies, and overseeing technology and application providers through scenario planning and policy reviews. Bender also described artificial intelligence oversight as a critical area of risk management. The board plans to recruit a chief risk officer once the framework is developed.
SERS' investment consultant, RVK, recommended the asset allocation, arguing that the current capital markets environment favors a refocus on private equity. Jim Voytko, RVK principal, director of research and senior consultant, said volatility had risen but was not near crisis levels. He also noted that the U.S. dollar is starting to decline and that international stocks are outperforming U.S. stocks for the first time in years, adding that diversification may matter considerably for institutional portfolios this year. SERS staff said the Arcline commitment aligns with the plan's Strategic Investment Plan of making fewer but larger commitments to top-tier managers.
RVK also highlighted fixed income as an increasingly important allocation. Voytko said the Magnificent Seven stocks are beginning to decline slightly in market dominance, and that higher interest rates have kept inflation in check while allowing investors to earn higher yields from longer-dated fixed income. Tony Johnson, an RVK principal and senior consultant, said fixed income is beginning to contribute meaningfully to returns after years of low rates following the global financial crisis, and that it should become a more significant contributor to asset allocation going forward.
Separately, at a board meeting held earlier this month, SERS' consultant EY presented a proposal for a robust risk management framework to identify systemic risks across the plan's investments, operations, funding, governance, legal and reputational channels. Dan Bender, EY managing director, said the process is ongoing and perpetual rather than tied to the life of a single fund. Risks identified included auditing third-party service providers and their policies, and overseeing technology and application providers through scenario planning and policy reviews. Bender also described artificial intelligence oversight as a critical area of risk management. The board plans to recruit a chief risk officer once the framework is developed.
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