Other state pension funds are starting to take more control over their private equity portfolios as they try to find ways to increase investment returns and cut costs. Earlier this year, the California Public Employees’ Retirement System announced plans to create portfolios with outside managers that would charge lower fees and offer more customized strategies. The Teacher Retirement System of Texas has expanded its program of co-investing in deals alongside outside private equity firms.
But creating an independent firm 100 percent owned by a state pension fund is novel.
“By creating it, we can build value for ourselves rather than buy into someone else’s firm,” said the 47-year-old Mr. Borden.
South Carolina is also increasing its allocation to private equity, which has historically generated higher returns than such traditional investments as stocks and bonds. After a decade of sluggish performance that made it difficult to achieve the fund’s target investment returns, the state hopes that raising its private equity exposure will help it to meet those goals. Over time, the fund is looking to commit as much as $8.7 billion to the strategy, according to fund documents.
South Carolina’s roughly $5 billion allocated to private equity has investments in some of the most prominent buyout shops, including Apollo, Apax Partners and Clayton, Dubilier & Rice, according to the fund documents.
The enterprise still plans to collaborate with these outside private equity funds. It expects to allocate as much as 40 percent of its assets to strategic partnerships and so-called co-investment opportunities in which the firm would piggyback on other funds’ deals. For instance, South Carolina already has a venture with Apollo, called Palmetto, in which it invests in European assets.
The South Carolina pension fund has approved $15 million in start-up costs for the firm, which is set to begin next month.
Hiring personnel will be a major challenge for the firm, which will have its headquarters in Charleston and an office in New York. Initial plans call for hiring 30 professionals by next year and ultimately more than 60 people, according to the fund’s documents. Although its reduced fees will save South Carolina money, the firm’s lower revenue will make it hard to pay compensation on par with Wall Street.
Another potential issue: Private equity professionals may see the firm’s link to the state pension fund — along with its unproven track record — as less appealing or prestigious than working for an established firm.
Mr. Borden pointed to a number of factors in its favor. The dislocation on Wall Street has resulted in a greater supply of financiers looking for new opportunities. And the firm would not have to court investors in a difficult fund-raising climate.
“Capital is scarce and talent is readily available,” Mr. Borden said. “We couldn’t have done this in 2007.”