New York Governor Kathy Hochul signed a bill that allows the state’s and New York City’s pensions to increase allocations to more expensive and opaque asset classes like private equity that could potentially deliver higher returns.
The bill raises the cap on alternative assets — which also include hedge funds, private real estate and direct loans to companies — as well as foreign stocks, to 35 percent from 25 percent. Boosting the limit will allow pensions, including the $233 billion New York State Common Retirement Fund and five New York City pensions with more than $230 billion in assets combined, to better diversify holdings, officials have said.
A provision in state law that sets the cap, known as the “basket clause,” hadn’t been adjusted since 2006.
“Amid a challenging market environment, we believe this is the most significant long-term adjustment we can make to safely maximize returns,” said New York City comptroller Brad Lander in an email. “I look forward to working in collaboration with each of our City’s public pension boards to deliver strong returns for New York City’s pensioners”
U.S. state and local-government pensions, which count on annual investment gains of about 7 percent on average, piled into alternative assets in recent decades when a slowdown in economic growth and low interest rates made it harder to meet long-term targets.
Such private offerings accounted for abut 70 percent of new capital raised in 2019, according to the U.S. Securities and Exchange Commission.
New York City’s civil employee pensions’ private-equity investments earned a 13.5 percent return on their buyout, venture capital and “special situations” funds in the 10-year period ending in June. That’s 0.4 pecent more than they would have earned in the Russell 3000, according to pension documents. The city employees’ private-equity investments have performed better over a five-year period, beating the Russell 3000 by 6.4 percentage points.
Private-equity firms and hedge funds often charge investors fees of as much as 2 percent of what they manage and 20 percent of profits. New York City’s five pension funds paid investment managers about $1.5 billion for the year ending June 30.
