Growth Asset Category Investment Policy Statement
Contents
A. GROWTH ASSET CATEGORY INVESTMENT OBJECTIVE
B. BENCHMARKS
C. INVESTMENT GUIDELINES
1. Investment Descriptions
2. Asset Class Construction
3. Asset Class Specific Risk Considerations
4. Investment Vehicles
5. Secondary Investments and Co-investments
6. Investment Vehicle Concentration
7. Liquidity
8. Distributed Securities
9. Performance Evaluation
10. Investment Period to Ramp-up
11. Rebalancing to Guidelines
D. MONITORING
E. POLICY HISTORY
A. GROWTH ASSET CATEGORY INVESTMENT OBJECTIVE
The Growth asset category seeks to achieve the following investment objectives:
- Attractive returns that tend to be generated during a high growth and
low/moderate inflationary environment, and which tend to be correlated to
equity and credit risk factors - A combination of capital appreciation, income, and cash flow generation
- Moderate levels of diversification within the asset category
Asset classes within the Growth asset category include:
- Global Equity
- Private Equity
- Credit
Asset class target weights within the Growth asset category are as follows:
| Asset Class | Minimum | Target Allocation | Maximum |
| Global Equity | 35% | 39% | 43% |
| Private Equity | 8% | 11% | 14% |
| Credit | 6% | 9% | 12% |
| Growth Asset Category | 59% |
Global Equity:
The investment objective of the Global Equity portfolio is to enhance total fund performance by investing in a diversified portfolio of publicly traded domestic and international equity securities across investment styles and market capitalizations, and through the use of passive and active externally managed strategies. The Global Equity asset class will strive to earn net returns in excess of the MSCI ACWI IMI global equity benchmark, primarily from the selection of investment managers. SCERS shall seek to maintain reasonable levels of aggregate risk, as measured through standard deviation and tracking error.
Private Equity:
The investment objective of the Private Equity portfolio is to enhance the total fund performance through investments in non-publicly traded securities. Private equity investments are illiquid and long-term in nature. To compensate for the illiquidity and the higher risks of the private equity market, the Private Equity portfolio is expected to generate a rate of return that exceeds the return of publicly traded equities over the long-term. Along with earning this ‘illiquidity premium’, SCERS shall strive to achieve additional excess returns primarily from the selection of investment managers.
Credit:
The investment objective of the Credit portfolio is to produce attractive risk adjusted returns and generate current cash flow through illiquid/private non-exchange traded lending and special situations strategies, as well as through liquid/publicly traded credit strategies through flexible mandates that can touch multiple points within the credit universe. To compensate for the general illiquidity of the asset class, the Credit portfolio is expected to generate a rate of return that exceeds the return of exchange traded bank loans over the long-term. Along with earning this ‘illiquidity premium’, SCERS shall strive to achieve additional excess
returns primarily from the selection of investment managers.
The Growth asset category total performance is evaluated by applying the investment performance of the individual asset class benchmarks weighted by the strategic asset allocation targets weights. The Growth asset class benchmarks are as follows:
Global Equity:
- Performance of the Global Equity asset class will be evaluated against the MSCI ACWI IMI. The underlying sub-asset classes and segments, will be evaluated and compared against the following benchmarks. The Global Equity portfolio, sub-asset classes, and most of the underlying segments are expected to outperform their respective benchmarks over a period of greater than three years.
| Sub-Asset Class |
Benchmark |
|---|---|
| Domestic Equity | Russell 3000 Index |
| Domestic Equity Large Cap | Russell 1000 Index |
| Large Cap Passive | Russell 1000 Index |
| Large Cap Active | Russell 1000 Index |
| Domestic Small Cap | Russell 2000 Index |
| Small Cap Active | Russell 2000 Index |
| Sub-Asset Class | Benchmark |
|---|---|
| International Equity | MSCI ACWI ex-US Index |
| International Equity Developed Markets | MSCI World ex-US Index |
| Developed Markets Large Cap Active | MSCI World ex-US Index |
| Developed Markets Small Cap Active | MSCI World ex-US Small Cap Index |
| International Equity Emerging Markets | MSCI Emerging Markets Index |
| Emerging Markets Active | MSCI Emerging Markets Index |
| Sub-Asset Class | Benchmark |
|---|---|
| Global/Unconstrained Equity | MSCI ACWI IMI |
Private Equity:
| SCERS Private Equity Portfolio | Benchmark |
|---|---|
| Policy Index Benchmark | Cambridge Associates LLC Global Private Equity & Venture Capital Pooled IRR |
| Long-Term Objective | MSCI ACWI IMI Index + 3% |
- The performance of the Private Equity portfolio is expected to exceed the return of the Cambridge Associates LLC Global Private Equity & Venture Capital Pooled IRR for the respective vintage years. The Cambridge Associates LLC Global Private Equity & Venture Capital Pooled IRR will also serve as SCERS’
Policy Index. - Over the long-term, the objective of the Private Equity asset class is to exceed the MSCI ACWI IMI Index by 3%, net of fees and expenses.
- Individual partnerships will be compared to the appropriate Cambridge Associates Universe category, adjusted for vintage year.
Credit:
| SCERS Credit Portfolio | Benchmark |
|---|---|
| Policy Index Benchmark | Cambridge Associates Private Credit Index |
| Long-Term Objective | Credit Suisse Leveraged Loan Index +2% |
- The performance of the Credit portfolio is expected to exceed the return of the Cambridge Associates Private Credit Index for the respective vintage years. The Cambridge Associates Private Credit Index will also serve as SCERS’ Policy Index.
- Over the long-term, the objective of the Credit asset class is to exceed the Credit Suisse Leveraged Loan Index + 2%, net of fees and expenses.
Global Equity:
Global Equity investments shall include equity securities purchased on listed U.S. stock exchanges, non-U.S. listed stock exchanges, over-the-counter (OTC) markets (including NASDAQ), and also includes equity securities of foreign companies traded on registered U.S. stock exchanges. Eligible investments shall include publicly-traded common stock and preferred stock. Eligible investments are also listed in the Investment Guidelines of the Investment Management Agreements (IMAs) of externally managed investment manager mandates.
Equity investments are managed through external investment manager strategies. SCERS’ equity asset class exposures are diversified across a variety of styles, factors, and capitalizations:
- Value Stocks: Stocks that trade at a lower price relative to their fundamentals and are considered undervalued by investors. Common characteristics of value stocks include high dividend yield, low price-to-book ratio, and/or low price-to-equity ratio.
- Growth Stocks: Stocks of companies whose revenues and earnings are expected to grow at an above-average rate relative to the broad equity market. Growth stocks typically pay smaller dividends, as a growth company would prefer to re-invest retained earnings back into the company.
- Core Stocks: Stocks of companies that are reliable and consistent growers, with predictable earnings that pay moderate levels of dividends. Core companies are financially healthy, and typically generate meaningful free cash flow.
- Other Style Factors: Includes factors outside of growth, value, and core, including quality, momentum, market sentiment, and idiosyncratic factors specific to a company.
- Large Capitalization Stocks: Stocks of companies with a market capitalization value generally in the range of companies within the Russell 1000 Index. Market capitalization is calculated by multiplying the number of a company’s shares outstanding by its stock price per share.
- Small Capitalization Stocks: Stocks of companies with a market capitalization value generally in the range of companies within the Russell 2000 Index. Market capitalization is calculated by multiplying the number of a company’s shares outstanding by its stock price per share.
Private Equity Investments:
Private equity investments primarily involve the purchase of unlisted, illiquid common and preferred equity, and to a lesser degree, subordinated and senior debt of companies that are typically privately held. Investment is authorized in vehicles and investment strategies that invest in a broad array of various securities, including but not limited to:
- Buyout Investments – Investments include acquisitions, recovery investments, and distressed for control investments (debt positions that are often converted to equity typically during a bankruptcy reorganization process). Investments are made across the market capitalization spectrum and typically involve the purchase of a control position (primarily majority positions, with some minority positions) in an established company and may include the use of leverage in the form of debt. Investments are typically made in years one through six and returns typically occur in years three through ten. The potential for fund term extensions of up to three years is
typically structured into most buyout funds. Investments may be made in companies that are either U.S. or non-U.S. domiciled. - Venture Capital Investments – Investments include companies in a range of stages of development from start-up/seed-stage, early stage, and later/expansion stage, but with a heavier focus on companies in their earlier stage of development. Investments are typically made in years one through six and returns typically occur in years four through ten. The potential for fund term extensions of up to three years is typically structured into most venture capital funds. Investments may be made in companies that are either U.S. or non-U.S. domiciled.
- Growth Equity Investments – Investments with properties and features of both buyouts and venture capital, and which falls between each on the risk-return spectrum. Includes minority investments in more mature and profitable companies looking to further accelerate growth by expanding operations or funding an acquisition. Investments are typically made in years one through six and returns typically occur in years four through ten. The potential for fund term extensions of up to three years is typically structured into most venture capital funds. Investments may be made in companies that are either U.S. or non-U.S. domiciled.
Credit:
Illliquid Credit
The bulk of Illiquid Credit is comprised of private lending-oriented strategies (Direct Lending and Opportunistic Lending), which are illiquid strategies focused on private loans to performing companies. Private lending strategies include primarily debt investments, where an investor expects to receive principal and interest, with the majority of returns being generated from cash flow yield. Private lending strategies are typically structured with floating rate loans, with a spread over a benchmark rate like SOFR, so cash flow income increases as interest rates increase, but can also include fixed rate loans. The Illiquid Credit sub-strategy also includes a small allocation to Special Situations.
- Direct Lending – Direct lending investments are directly originated, nontraded, performing loans made to primarily middle market companies. Direct lending investments primarily are comprised of senior secured debt, which can be secured by general corporate collateral or by a company’s specific collateral. Equity participation can be structured into the loan, typically through warrants, but this is generally a small component of the strategy. Direct lending investments often utilize leverage (typically in the range of 0.5 to 2.5 times) at the fund level. Direct lending investments also have broadly diversified sector exposure and include a combination of sponsored (private equity backed companies) and non-sponsored borrowers, as well as purchases of loans in the secondary market. Non-sponsored loans will typically have higher yields and stronger covenants than sponsored loans. Investments will primarily be made in U.S. domiciled companies; however, non-U.S. domiciled companies can also be included.
- Opportunistic Lending – Opportunistic lending investments are also performing loans like direct lending (not distressed) but represent a broader range of investment types. Opportunistic lending includes mostly senior secured structures, but can also include subordinated debt structures, convertible debt, and structured equity. Opportunistic lending is often designated as an asset-backed lending strategy, where collateral comes in the form of specific assets such as receivables, inventory, or royalty streams. Opportunistic lending investments can have meaningful equity participation, depending on the structure. This is often in the form of warrants and convertible bonds but can also include direct equity participation. Opportunistic lending investments typically utilize little to no leverage. Opportunistic lending funds can have a targeted sector focus, which can often include only one sector, and generally are targeted toward non-sponsor borrowers. Opportunistic lending investments can also include acquisition and leasing strategies that produce income and cash flows, such as aircraft leasing and entertainment royalties. Investments will primarily be made in U.S. domiciled companies; however, non-U.S. domiciled companies can also be included.
- Special Situations – Special Situations are opportunistic investments in a broad category of assets, typically related to corporate or market dislocations. Specific examples of Special Situations investments include sub- and non-performing loans, secondary debt purchases, new originations of debt instruments including rescue financings, and structured credit. Special Situations primarily include debt investments, although it can include investments with equity participation. Special Situations investments can include investments in companies that are facing financial or operational stress. Special situations is expected to make up a small portion of the Illiquid Credit sub-strategy (around 10%).
Liquid Credit:
Liquid Credit strategies primarily invest in liquid/publicly traded credit though flexible mandates that can touch multiple points within the liquid credit universe. Liquid Credit investments typically generate moderate income and also serve as a source of return enhancement. Eligible investments for Liquid Credit are broad and include but are not limited to below investment grade high yield corporate bonds and bank loans, investment grade corporate bonds, derivatives, structured credit, agency and non-agency backed mortgage-backed securities, commercial mortgage-backed securities (CMBS), collateralized loan obligations (CLOs) and collateralized debt obligations (CDOs), asset-backed securities, stressed/distressed corporate credit, government bonds, agencies, agency and non-agency mortgage-backed securities, international non-dollar fixed income securities, emerging markets debt, equity securities, and cash. Some strategies can potentially own equitylike securities. While Liquid Credit strategies mostly invest in liquid/publicly traded markets, strategies can also include hybrid credit strategies that invest opportunistically across both public and private markets. Liquid Credit investments are made within an opportunistic framework, where potential investments are expected to earn a return in line or greater than Illiquid Credit strategies to be considered for investment.
The expected volatility of the Growth asset category investments is often higher than in other parts of the SCERS portfolio. The asset category is diversified by investment strategy and geography. The expected portfolio construction parameters for the Growth asset category investments are reflected in the target allocations and ranges below.
Distinguishing characteristics of the Growth asset category are: (1) a wide range of assets in both the public markets (liquid) and private markets (illiquid); (2) and a number of differing investment strategies across several underlying asset classes. It is anticipated that SCERS will seek diversification with respect to investment strategies within the asset classes where warranted.
Global Equity:
Target allocations and ranges for the Domestic Equity, International Equity, and Global/Unconstrained sub-asset classes are provided below:
| Sub-Asset Class | Target Allocation | Target Allocation |
|---|---|---|
| Domestic Equity | 19% | |
| Domestic Equity Large Cap | 90% | |
| Large Cap Passive | 50% | |
| Large Cap Active | 40% | |
| Small Cap Active | 10% |
The Domestic Equity sub-asset class contains a combination of passive and active mandates and is separated between the large capitalization and small capitalization segments, with the objective to maintain diversification across investment styles (i.e., growth, value, core), sectors, and industries.
| Sub-Asset Class | Target Allocation | Target Allocation |
|---|---|---|
| International Equity | 14% | |
| International Equity Developed Markets | 70% | |
| Developed Markets Large Cap Active | 60% | |
| Developed Markets Small Cap Active | 10% | |
| International Equity Emerging Markets | 30% | |
| Emerging Markets Active | 30% |
The International Equity sub-asset class contains 100% active mandates, without any passive allocations, and is separated between developed markets and emerging markets segments. The developed markets are further broken out between large capitalization and small capitalization segments The emerging markets allocation is diversified across capitalization and styles. The International Equity sub-asset class seeks to maintain diversification across investment styles (i.e., growth, value, core), sectors, and industries.
| Sub-Asset Class | Target Allocation | Target Allocation |
|---|---|---|
| Global/Unconstrained Equity | 6% | |
| Global Equity | >/= 50% | |
| Non-Beta 1 (Long/Short) | </= 25% | |
| Niche or Country/Sector Concentrated | </= 25% |
The Global/Unconstrained sub-asset class contains a broad range of strategies with greater flexibility to generate excess returns above the broad Global Equity asset class benchmark (MSCI ACWI IMI). The primary allocation within the sub-asset class (at least 50%) is comprised of a ‘Global Equity’ segment that has the flexibility to allocate across a wide range of global equity markets, including U.S., developed international, and emerging markets.
The Global/Unconstrained sub-asset class also contains an ‘Unconstrained’ segment, comprised of strategies that are more benchmark agnostic compared to traditional public equity investments. Examples include sector and country specific strategies, and non-beta 1 strategies that are comprised of long and short exposures. ‘Unconstrained’ strategies are expected to predominantly invest in publicly traded equities but can opportunistically allocate to other market segments (such as credit) if the manager believes it can earn equity like returns with less risk at certain points in a cycle. ‘Unconstrained’ strategies do not have a target allocation but can comprise up to 50% of the Global/Unconstrained sub-asset class’s target allocation.
Private Equity:
For the Private Equity asset class, the targeted and range of investment exposures to the various private equity investment sub-strategies and geographies are shown in the table below. These exposures are measured on a fair value basis. SCERS shall endeavor to limit the potential for any concentration in a type of investment strategy or geography to negatively impact long-term returns in the Private Equity asset class by adhering to these targets and ranges. It is expected that the non-U.S. investments will be further diversified across different regions.
| SCERS Private Equity Portfolio Construction | Minimum | Target | Maximum |
|---|---|---|---|
| Total Private Equity Portfolio | 8% | 11% | 14% |
| Sub-Strategy: | |||
| Buyout | 40% | 65% | 80% |
| Venture Capital | 10% | 20% | 40% |
| Growth Equity | 10% | 15% | 35% |
| Geography: | |||
| U.S. | 70% | 80% | 90% |
| Non-U.S. | 10% | 20% | 30% |
SCERS will favor a diversified approach by allocating approximately 2%-6% of the total Private Equity target allocation to each fund. SCERS will strive to maintain ongoing long-term relationships with approximately 25 private equity managers with an expected range of 20-30 manager relationships. No single investment manager will exceed 10% of SCERS’ total active commitment level, unless the vehicle is a fund of funds or separate account advisory relationship. The optimum number of investment vehicles in the portfolio and the maximum exposure to any one investment vehicle varies with time and will be evaluated as part of the Private Equity Asset Allocation Structure.
Credit:
For the Credit asset class, the targeted and range of investment exposures to the various credit investment sub-strategies and geographies are shown in the table below. These exposures are measured on a fair value basis. SCERS shall endeavor to limit the potential for any concentration in a type of investment strategy or geography to negatively impact long-term returns in the Credit asset class by adhering to these ranges. It is expected that the non-U.S. investments will be further diversified across different regions.
The Credit sub-strategies include Illiquid and Liquid Credit. There are not specific targets to the sub-strategies, but rather ranges, to allow for greater flexibility in implementation. Illiquid Credit will make up the bulk of the Credit asset class, with a range of 60% to 100%, meaning that SCERS’ allocation to Illiquid Credit strategies will be at least 60% of the overall Credit portfolio. Liquid Credit strategies will be allocated on a more opportunistic basis toward strategies that are capable of generating returns in line with those of Illiquid Credit strategies. The range for Liquid Credit strategies is 0% to 40%. The Illiquid sub-strategy is comprised of the Direct Lending, Opportunistic Credit, and Special Situations segments. While these segments do not have specific targets and ranges, Direct Lending is expected to make up the majority of the allocation, followed by Opportunistic Credit, and to a lesser extent Special Situations.
| SCERS Credit Portfolio Construction | Minimum | Target | Maximum |
|---|---|---|---|
| Total Credit Portfolio | 6% | 9% |
12% |
| Sub-Strategy: | |||
| Illiquid Credit | 60% | - |
100% |
| Direct Lending | |||
| Opportunistic Lending | |||
| Special Situations | |||
| Liquid Credit | 0% | - | 40% |
| Geography: | |||
| U.S. | 75% | - | 100% |
| Non-U.S. | 0% | - | 25% |
SCERS will favor a concentrated approach within the Credit asset class and will strive to maintain ongoing long-term relationships with approximately 10-15 Illiquid Credit managers and 0-5 Liquid Credit managers. The optimum number of investment vehicles in the portfolio and the maximum exposure to any one investment vehicle varies with time and will be evaluated as part of the Credit Asset Allocation Structure.
3. Asset Class Specific Risk Considerations
Global Equity
With public equity investments, there is an inherent risk that the actual returns will vary significantly from expected returns. Publicly traded equities generate significant levels of volatility (measured by standard deviation), and emerging markets tends to exhibit higher volatility than developed markets. Public equity investments also expose investors to high levels of equity market beta and the equity risk premium (ERP). Investment returns and risks within SCERS’ Global Equity portfolio shall be measured according to all or some of the following measures:
- Standard Deviation: A measure of volatility which calculates the dispersion of returns from an average rate of return.
- Sharpe Ratio: A ratio that measures risk-adjusted performance. In particular, it measures a portfolio’s excess returns over the risk free rate and divides the result by the standard deviation of the portfolio returns.
- Tracking Error: The standard deviation, or volatility, of excess returns generated between a portfolio and that of a benchmark.
- Information Ratio: A risk-adjusted performance measure which calculates a portfolio’s excess returns above a benchmark, and divides the result by the tracking error, or volatility of the excess returns.
- Beta: A measure of the sensitivity of a security or portfolio in comparison to the market as a whole. Beta measures the tendency of a security’s or a portfolio’s return to swings in the market.
The investment risks associated with the Global Equity portfolio shall be addressed in several ways:
- Diversification by geography: SCERS shall maintain a Global Equity portfolio that is diversified across geographies. Global equities shall encapsulate the domestic equity markets and the international equity markets, including both developed and emerging markets. SCERS’ Global Equity portfolio, which is comprised of the domestic equity, international equity, and global/unconstrained sub-asset classes, will benchmark itself against the MSCI AWI IMI, which is diversified across global geographies.
- Diversification across style: SCERS’ Global Equity portfolio shall seek to maintain style neutrality across the sub-asset classes. This includes an approximate equal weight across both the value and growth styles, and/or to core strategies that will inherently be style neutral across a market cycle.
- Diversification across market capitalization: SCERS’ Global Equity portfolio invests across the large-capitalization and small-capitalization spaces. While the portfolio does not consist of any dedicated mid-capitalization mandates, exposure to mid-cap stocks is provided by SCERS’ large and small capitalization strategies
- Diversification across externally managed active investment mandates and passive investment mandates: A key variable in the decision to use active mandates over passive mandates is the probability of active equity managers generating consistent excess returns over the benchmark in aggregate. The ability to generate excess returns depends on the region, market capitalization, and style that an investor has exposure to. Within domestic equities, domestic small cap has historically produced a higher probability of excess returns versus domestic large cap. International developed and emerging market equities have historically produced a higher probability of excess returns. Global/unconstrained strategies are expected to generate excess returns over the MSCI ACWI IMI.
- Diversification by investment manager: SCERS’ Global Equity portfolio will seek to allocate capital to a variety of external investment managers in order to ensure diversification by sub-asset class, style, sector, and region, and to avoid concentration of capital to any specific manager or factor exposure. However, SCERS will seek to avoid manager redundancies through over-diversification to external investment managers. This will be accomplished by keeping track of portfolio characteristics and exposure levels of investment managers, including unnecessary overlap of individual security positions among managers.
- Diversification by sector and industry: SCERS’ Global Equity portfolio shall achieve diversification across sectors and industries among its equity investment managers, and across the sub-asset classes. Individual investment manager guidelines shall call for the prudent allocation of assets across sectors and industries, to avoid over-concentration to any sector or industry. Individual strategies within the global/unconstrained sub-asset class can contain greater concentration at the sector/industry level.
Private Investments
Private investments, (e.g. private equity and private/illiquid credit), like investments in most asset classes, bear an inherent risk that the actual return of capital, gains, and income will vary significantly from the return and amounts expected. The expected volatility of private investments in aggregate is high among major asset classes. The investment risk associated with private investments shall be addressed in several ways:
- Diversification by geography and investment strategy. SCERS will endeavor to limit the potential for any concentration in a type of investment strategy or geography to negatively impact long-term returns in the Growth asset category by investing across regions and strategies.
- Diversification by vintage year. SCERS will strive to limit the potential for investments during any given year in the business cycle to negatively impact the long-term results of the Growth asset category by investing across business cycles and vintage years. It is anticipated that SCERS will commit to private market funds (i.e., private equity and private credit) over multiple years, whereby the aggregate amount will be spread across the entire business cycle. This will serve to limit the exposure or risk to investing and relying on the performance of private funds in any given year of the business cycle. The Board will determine with SCERS’ investment staff and consultant the funding allocation for the private segments of the Growth asset category each year in conjunction with its annual review of the Asset Allocation Structure and Annual Investment Plan for asset classes such as Private Equity and Private Credit.
- Diversification by industry or business sector. SCERS will attempt to limit the potential for any one industry or business sector to negatively impact the long-term results by investing across a variety of industries.
- Diversification by investment manager and general partner. SCERS will endeavor to invest across a number of investment managers and limited partnerships to mitigate the potential negative impact of a concentrated portfolio of investment managers. The optimum number of investment vehicles in the portfolio and the maximum exposure to any one investment vehicle will vary with time and will be evaluated as part of the Growth asset allocation structure.
The vehicles for investments within the Growth asset category reflect the broad scope of investments held within this asset category.
Global Equity and Liquid Credit
Investment vehicle options for investing in the Global Equity and Liquid Credit segments include separate accounts, in which assets are custodied at SCERS’ custodian, and/or commingled funds, including limited partnerships and institutionally investor-focused mutual funds. Determinants as to whether SCERS will invest in a separate account versus a commingled fund include availability of a separate account option, complexity of the underlying assets, whether individual country markets require opening (i.e., emerging markets investing via a separate account), fee levels, transparency, and whether a commingled fund’s investment guidelines are consistent with SCERS’ investment objective.
Private Equity
Investment vehicles for private equity investments are often commingled funds, structured as private limited partnerships, but may also include other entities such as limited liability companies or offshore corporations. Private equity limited partnerships are drawdown structures with management fees and carried interest. It is anticipated that the majority of SCERS’ Private Equity investments will be made through direct investments into private equity limited partnerships.
SCERS may also invest directly in fund-of-funds (FoF) vehicles. In these vehicles, the FoF invests in private equity partnerships on a discretionary basis. FoFs will own the underlying private equity partnerships and SCERS obtains contractual rights to the FoFs’ portfolio through a limited partnership. A FoF will have investors other than SCERS.
SCERS may also invest in separate account relationships or fund of one structures established with one or more fiduciary oversight managers. These managers will make commitments to private equity limited partnerships, or other entities such as limited liability companies or offshore corporations, either on a discretionary or advisory basis.
Periodically, an existing general partner (GP) will present existing investors/limited partners (LPs) with the option to roll their investment in an underlying fund company or a group of companies into a new fund that the GP controls, generally known as a Continuation Vehicle (CV). The creation of a CV by a GP is typically the result of the GP believing there is more potential value in the underlying company; however, more time is needed to realize that value. Generally, the GP offers LPs the option to take liquidity by selling their stake in an underlying company or rolling their position by making a commitment into a new fund/CV controlled by the same GP. The decision to take liquidity or roll into the new fund will be made based on the implementation protocol for alternative assets/private market investments.
Illiquid Credit (i.e. Private Credit)
A common investment vehicle for private credit investments is a commingled fund, structured as a limited partnership. Private credit limited partnerships are drawdown structures with management fees and typically carried interest. Direct lending strategies generally have lower fees and carried interest than other private market strategies, and often only charge management fees on invested capital, not committed capital. Opportunistic and special situations funds can have higher management fees and carried interest given their higher return targets.
Separate accounts or fund of ones are also vehicles that can be used to invest in private credit. These vehicles are larger and customizable accounts with investment managers that have greater flexibility in the guidelines, greater input from Staff and consultant, and may have lower fees. Separate accounts and fund of ones generally have a size of $100 million or greater.
Another investment vehicle that is common in private credit is private business development companies (BDCs). Private BDCs have similar investment strategies as a private commingled fund, but have a differing structure. These vehicles can have lower fees, lower yields, and the potential to earn a return premium by going public through the IPO markets.
SCERS may also invest directly in fund-of-funds (FoF) vehicles. In these vehicles, the FoF invests in private credit partnerships on a discretionary basis. FoFs will own the underlying private credit partnerships and SCERS obtains contractual rights to the FoFs’ portfolio through a limited partnership. A FoF will have investors other than SCERS.
Illiquid Private Credit investments may also encounter CVs as a portfolio matures. These investments will have similar characteristics and follow a similar pattern to CVs in Private Equity.
5. Secondary Investments and Co-investments
Secondary investments are made when an investor purchases the limited partnership interest of another investor in an existing fund. Secondary investments also include sales of stakes in existing funds from one investor to another. A coinvestment is a direct investment in an underlying portfolio company where a manager offers investors the opportunity to invest directly in an underlying company alongside the fund investment. Investments may be made in companies that are either U.S. or non-U.S. domiciled.
Neither secondary investments nor co-investments are considered separate investment strategies within the Growth asset category. SCERS will seek to allocate to secondary investments and co-investments on an opportunistic basis. It is expected that these investments will constitute a small portion of the overall Growth asset category, and any underlying asset class, if any.
Secondary sales will serve as a portfolio management and rebalancing tool for the Private Equity and Illiquid Credit segments. Any secondary sales will be considered on a standalone basis. Secondary investments (both purchases and sales) and co-investments will be implemented according to the alternative assets/private markets implementation protocol. If a sale of assets is considered, Staff will keep the Board informed throughout the process.
6. Investment Vehicle Concentration
SCERS shall typically not comprise more than 20% of an investment strategy’s assets under management at the initiation of the investment, or for private market investments 20% of any one investment vehicle such as a limited partnership, limited liability company, or offshort corporation. Post-investment, SCERS shall monitor the investment strategy asset base, and SCERS’ concentration relative to the asset base. An exception to this guideline is an investment in a separate account or fund of one, whereby SCERS may be the sole investor. In these circumstances, SCERS will endeavor to ensure that it does not generate a majority of the firm’s overall profits.
Overall, the Growth asset category will maintain varying levels of liquidity based on the underlying sub-asset classes:
Global Equity and Liquid Credit
Investments in public equity and liquid credit markets offer varying degrees of liquidity depending on region, market capitalization for equities, and bond sector; however, liquidity is generally high relative to other asset classes. In public equities, larger capitalization stocks generally have higher average daily volumes and a greater number of trading intermediaries and therefore offer higher liquidity levels than smaller capitalization stocks.
Among investment vehicles, investing through separate accounts typically offer the highest liquidity, as the underlying assets are owned by SCERS, and are held at SCERS’ custodian. While the underlying assets of commingled funds offer high liquidity, there is the potential for less immediate liquidity when redeeming assets from a commingled fund. This liquidity can vary from immediate to monthly liquidity, depending on the structure of the fund.
Private Equity and Illiquid/Private Credit
Private equity investments are illiquid and typically have long expected holding periods such as 10-13 years. Investments are typically held until maturity and selling prior to maturity may result in realizing a sales price that reflects a discount to fair market value.
Private credit investments are illiquid and typically have long expected holding periods such as 5-12 years. While the majority of investments are tied to coupon payments and cash distributions are returned to investors on a quarterly basis, most investments are held until maturity or full repayment and selling an interest in a fund prior to maturity may result in realizing a sales price that reflects a discount to fair market value.
Liquidity risk is managed by minimizing the possibility of forced sales that may arise from exceeding maximum exposure limits, or lowering asset allocation targets to private equity or private credit investments. In order to better assess liquidity needs, a capital budget and cash flow forecast will be developed over a ten-year horizon and updated as necessary. The assumptions of this forecast are stress tested in the context of the total fund to assess the effect of worst-case liquidity scenarios. If liquidity is needed within private markets an option is through a secondary sale as discussed in the Secondary Investments and Co-Investments section. Secondary sales can incur discounts in pricing relative no Net Asset Value (NAV).
Within the Global Equity asset class, SCERS shall typically seek receipt of distributed securities from investment managers. For separate accounts, assets are custodied at SCERS’ custodian, which SCERS can liquidate at its own discretion. For commingled funds, SCERS generally prefers to receive distributed securities, which it can liquidate at its own discretion. The exception is for those funds that require that shares be redeemed from the fund, or if it is more prudent to have a fund redeem shares.
SCERS shall avoid the direct receipt of distributed securities from individual private equity and illiquid/private credit funds, and most liquid credit funds. However, if such receipt is unavoidable, SCERS shall ordinarily direct the sale of securities distributed by its investment vehicles through a third-party broker dealer as soon as practically possible and strive to not impair the value of the security.
- Performance of the Growth asset category will be evaluated quarterly against the weighted average of the policy index benchmarks outlined in the ‘Benchmarks’ section above.
- Individual investment vehicle performance will be evaluated on a monthly basis for Global Equity and on a quarterly basis for Private Equity and Credit compared to the performance of respective peer universes and vintage years (where applicable).
- It is recognized that immature private investments within closed-end investment vehicles will ordinarily have a ‘J-curve effect’ whereby there are low to negative returns in the initial years due to the payment of investment management fees during a period when investments are typically carried at cost and returns have not been realized.
10. Investment Period to Ramp-up
It is recognized that it can take multiple years for segments of the Growth asset category to be fully invested, and that there may be deviations from the previously mentioned targets during the ramp-up period. During the Private Equity and Credit asset class ramp-up periods, exposures can be estimated using percentages of committed capital. During the ramp-up period for the Growth asset category, and subsequent to reaching the target allocation, SCERS’ Overlay Program will rebalance the Growth asset category to the target allocation, using the designated Growth overlay proxy within the investment guidelines for the Overlay Program.
It is anticipated that the majority of changes to rebalance the private market components of the Growth asset category will be made on a long-term basis due to: (1) the general illiquidity of the private investments, which often have investment horizons of 10-15 years; and (2) the potential for discounts that can be applied if and when private holdings are liquidated in the secondary market. Accordingly, when these guidelines are exceeded, it is anticipated that reducing exposures will be carried out within a long-term time-frame and over a period that is as soon as practical to reflect the illiquidity of many Growth investment vehicles.
SCERS utilizes an Overlay Program, managed by a strategic overlay manager, to equitize cash and to rebalance asset categories within SCERS’ total portfolio, including the Growth asset category. Rebalancing occurs quarterly, unless upper or lower bands are breached intra-quarter, in which case rebalancing occurs upon the breach of a band.
Through the monitoring process, Staff and consultant will extend the initial due diligence into a formal quarterly, semi-annual, and annual process which regularly seeks to determine whether the manager is meeting the Growth asset category’s, and its underlying asset classes, investment objectives and other requirements. In the broadest sense, the monitoring process is intended to determine whether the initial reasons for selecting the strategy and investment vehicle remain valid. The monitoring process will disclose whether there has been any material deviation from the investment philosophy and process; the personnel responsible for managing the investment vehicle are still in place; the organization continues to be stable; performance and risk meet expectations; and the investment vehicle manager adheres to its investment and other requirements. The underlying principle of the monitoring program is to determine whether all risks to which SCERS is exposed through the use of outside investment advisors have been identified, understood, and, to the extent possible, controlled. The monitoring process focuses on four areas:
- Compliance with reporting and valuation requirements
- Continuity of investment philosophy and process
- Stability of personnel and organization; and
- Performance and risk management
Staff and consultant will aggregate investment vehicle data and perform analysis on the overall Growth asset category, and its underlying asset classes, paying careful attention to individual investment vehicle allocations and strategy/sector concentrations to strive to achieve proper diversification across the Growth asset category. Staff and consultant will also conduct ongoing portfolio reviews and due diligence with the respective investment vehicle managers. Reviews can take place in person, either at SCERS’ or the consultant’s office, or the investment manager’s office, or through a web conferencing platform (i.e., Zoom). Investment manager site visits will be performed to confirm that appropriate infrastructure is in place to support the investment process. Staff and consultant will provide the Board with regular performance reports and advise the Board of other matters as appropriate.
If, during the monitoring process, SCERS identifies areas of the Growth asset category that are not compliant with the objectives, guidelines, and constraints, identified in this investment policy statement, then reasonable efforts will be made to cure the deficiency. These reasonable efforts will consider the illiquidity of the asset class and transaction costs to be incurred compared to the risk of non-compliance.
| Date | Description |
| 10-20-2011 | Board adopted Hedge Fund asset class investment policy statement |
| 07-10-2014 | Board adopted Equity asset class investment policy statement |
| 07-10-2014 | Board adopted Fixed Income asset class investment policy statement |
| 04-19-2017 | Board adopted Private Equity asset class investment policy statement |
| 06-21-2017 | Board adopted Private Credit asset class investment policy statement |
| 11-05-2018 | Board adopted reformatted and consolidated Growth asset category investment policy statement |
| 03-20-2019 | Amended Growth asset category investment policy statement |
| 03-08-2020 | Amended Growth asset category investment policy statement |
| 06-15-2022 | Amended Growth asset category investment policy statement |
| 08-20-2025 | Amended Growth asset category investment policy statement |