Smaller and mid-size pension plans are taking advantage of what used to be the exclusive domain of larger pension funds.
At Benefits Canada’s DB Investment Forum in Toronto on Dec. 11, Terri Troy, CEO and Chief Investment Officer for the Halifax Regional Municipality Pension Plan (HRM) provided private investment examples for smaller and mid-size plans that provide not only greater diversity of investment but also cost savings and the potential for greater returns in the long term.
“We have about $600 million invested in private investments right now along infrastructure, private equity, private debt and real estate, and our annual savings alone are about $4.8 million a year, and we’ve estimated that our one-time savings down the road is mostly due to performance fee savings, which is about $68 million,” noted Troy.
She stressed that in-house management of private investments can create cost savings to the tune of between 5% to 10% of assets under management.
The $1.7-billion plan is allowed to allocate 50% of its portfolio in the private space but currently it has 37% of its portfolio in private investments.
The genesis of private investment for HRM began in 2008 when it wanted to improve its risk/adjusted returns to meet an overall portfolio return of about 6.55% per year.
Currently, HRM has allocated 12.4% to infrastructure, 6.8% to private debt, 7.9% to private equity and real estate at 9.7%. Within those assets, plan sponsors can look at investments such as primary funds, secondary funds, direct secondary funds, co-investments, club deals and direct investments.
One example of HRM’s strategy occurred in 2011 when it purchased two of four infrastructure secondary funds offered to it for US$31 million. Because assets were not performing well, HRM received a 23% discount but after having done due diligence recognized the potential value. “We had conviction that they would turn around,” Troy said. Today the funds are tracking to return 15%. If HRM would have invested in the primary market rather than the secondary market, the return would have only been six percent.
Overall, noted Troy, smaller funds should take advantage of access to these markets often used by larger funds to achieve a significant cost savings as well as potential for higher returns in the long term.
Stay tuned for more coverage from Benefits Canada’s DB Investment Forum.