HARRISBURG – The Pennsylvania Public School Employees’ Retirement System netted $1.44 billion in profits from its private markets holdings, which is more than three times higher than the carried interest shares its business partners earned, in 2018.
PSERS’ 9.1% internal rate of return on $8.2 billion in private equity, private real estate and private credit assets was released Thursday at a public meeting of the Board of Trustees’ Investment Committee. The report covered performance for various time periods ended December 31, 2018.
That one-year period pushed PSERS’ net profits to $25.6 billion since inception of the private markets program in 1980.
PSERS investment professionals have provided the Trustees with an end-of-the-year private markets report for more than two decades. As part of PSERS’ historic commitment to transparency, the report has evolved to provide more information on asset performance, profits and costs associated with 223 active private market funds contractually held by 71 general partners.
“The analysis that went into this report took significant staff hours among PSERS internal investment team and its private markets consultant, Hamilton Lane,” said Charlie Spiller, PSERS Deputy Chief Investment Officer for Private Markets. “That was time well spent. This report shows the value these holdings have on PSERS’ ability to generate strong investment returns for our members, as well as, the positive impact the holdings have on the overall economy.”
The report shows PSERS private equity assets have performed very well since the Great Recession. The report shows PSERS’ private market funds consistently perform as well or better than a long-term blended public market index portfolio (70% Russell 3000 Index/30% MSCI All-Country World), a custom U.S. Index that best represents the geographical exposure of PSERS’ portfolio.
PSERS private markets program directly impacts Pennsylvania's economy by investing in funds that include multiple businesses located across the state. Those funds have a combined net asset value of nearly $36.2 billion and PSERS' market share of that total is nearly $1.9 billion. The state-based businesses that make up those funds employ 50,357 people and create a combined payroll of $654 million in the Commonwealth. Globally, PSERS’ commitments supported at least 2.7 million jobs.
For the second year in a row, the report tabulated cumulative carried interest paid and accrued across asset classes. PSERS general partners, across all private asset classes, earned $410 million in carried interest alongside PSERS’ profits of $1.44 billion in 2018.
Carried interest is a share of investment profits that is paid out when fund performance is strong. Contractually, the general partner only receives profit shares if it repays all of PSERS’ start-up, investment and fixed management fees, and hits an annual preferred rate of return, typically set at 8%. If the general partner meets both criteria, PSERS typically retains 80% of profits and the general partner keeps 20%.
About the Pennsylvania Public School Employees' Retirement System
PSERS was founded in 1917 to oversee a statewide defined benefit pension plan for public school employees. PSERS’ role expanded in 2019 to include oversight of a new defined contribution plan. PSERS membership covers about 256,000 active and 233,000 retired school employees.