New York Pension’s Schloss Raising Allocation to Private Equity

New York City employees’ pension fund is increasing its allocation to private equity to 6.5 percent from 4 percent and using fewer firms in pursuit of total returns of 8 percent, said Larry Schloss, chief investment officer and deputy comptroller for pensions.

The city’s pension plans to allocate $2.5 billion annually for the next four to five years to increase its private-equity commitments, Schloss said yesterday at the Bloomberg Dealmakers Summit in New York.

The pension will sell about $2 billion in existing private- equity funds as it seeks to pare relationships to about 70 firms in the “top quartile” from 106 when Schloss joined the pension in January 2010, he said. The city will “write bigger checks” of more than $300 million, versus about $100 million on average to each fund before the overhaul, he said.

“When I got here, we had $12 billion commitments, $7.2 billion in the ground, 106 GP relationships and 162 funds,” Schloss said. “Our 12-year IRR was 6.8 percent -- not very good,” he said, referring to the internal rate of return.

The $41.8-billion New York City Employees Retirement System, whose 347,000 members are the most of any U.S. municipal retirement fund, aims to generate returns of at least 8 percent, Schloss said. Private-equity firms, which typically buy companies using loans secured on the targets and work to improve performance before selling them in five to 10 years, are a long- term commitment that offer potentially the highest returns, Schloss said.

“We have great expectations for private equity,” he said.

The firms get money from investors including pension plans and endowments with a mandate to invest it within five to six years and return it with a profit after about 10 years. Private- equity firms typically charge an annual management fee equal to 1.5 percent to 2 percent of the fund, and keep 20 percent of profit from investments.

To contact the reporters on this story: Beth Jinks in New York at bjinks1@bloomberg.net; Jason Kelly in New York at jkelly14@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net