One US pension’s unusual plan to lower fees

PSERS may face difficulties persuading would-be partners to take part in an uncommon strategy aimed at helping it reduce its costs.

A $62 billion pension is seeking to reduce the real estate fees it pays by $900 million over the next 30 years. The cost-saving mission is part of a larger effort to cut $2.5 billion in fees across asset classes over that period, PERE reported this week.

The Pennsylvania Public School Employees’ Retirement System’s efforts exemplify an American pension cohort still concerned about the level of fees they are currently paying for their private real estate exposures. Across the country, New Mexico’s $23 billion sovereign wealth fund is looking to do likewise. It is undertaking a study to validate the fees paid to general partners across its entire private markets portfolio, PERE’s sister publication Private Equity International has reported.

PSERS is not relying on tough negotiating to cut its fee load, something hard to do when the best managers have years of solid performance to give them leverage. A study published last year by investment advisory firm Cliffwater of 32 state pensions found that the median 10-year real estate return was 5.8 percent for the decade ending June 30, 2016. Meanwhile, the NCREIF Property Index – which does not incorporate management fees – returned 7.4 percent over the same time.

Instead, in its quest for lower fees, PSERS is joining the likes of the Los Angeles Department of Water and Power Employees’ Retirement Plan in exploring the world of co-investments for solutions. PSERS believes the tactic needs the hire of another investment professional, but predicts saving a net $750,000 annually. It will also look to co-invest with other investors with direct real estate programs to help meet the aim.

In a departure from many of its peers, however, PSERS is targeting co-investments with managers with which it is not also a fund investor. Whether this strategy has legs remains to be seen. One chief executive of a US-based manager that has raised co-investment vehicles for state pension funds told PERE this week his firm has been approached by non-fund investors to co-invest. He turned them down. Like other managers, he prioritizes offering co-investments to fund investors.

Nevertheless, regardless of this plan’s viability, managers will be alive to disquiet surrounding fees at an active US pension. PSERS, which managed $6.1 billion in real estate as of June 30, 2017, committed $350 million to three 2018-vintage vehicles and $600 million to five 2017-vintage vehicles, according to PERE data. It is not a mega pension investor, but neither are its activities in the asset class negligible.

Besides, PSERS is far from alone in its ambitions to lower fees, with one consultant telling PERE this month it wants to meet Blackstone to discuss the firm’s next mega-fund. It is particularly interested in the vehicle’s fees and hurdles, in part to help it benchmark its own expectations when negotiating with other managers. That consultant said it did not want to see 1.75-2 percent management fees, but rather 1-1.25 percent, assuming these are enough to viably run the management operation. In exchange, the consultant would even be willing to accommodate a lower hurdle on that basis – 8 percent instead of 9-11 percent.

At this point in the cycle, it is only natural that well-performing managers have most leverage. But as markets turns, those already listening and heeding the wishes of their investors will be best equipped to handle their money in a downturn.

To contact the author, email