What's Happening?
The City of Milwaukee Employees’ Retirement System (CMERS), a $6.7 billion pension fund, is planning to halt new private equity commitments in 2027. This decision is part of a long-term de-risking strategy aimed at reducing the fund's exposure to this
asset class. The recommendation, presented in materials for the Annuity and Pension Board’s September 24 meeting, follows a private equity pacing review conducted by investment consultant Callan. Callan advised against making new commitments for the upcoming year, with this decision subject to annual review as the pension fund works towards a lower private equity allocation. As of August 31, private equity constituted approximately 12.1% of CMERS' portfolio, exceeding its current target allocation of 11% and valued at around $810.3 million. This proposed pause follows a similar decision to make no new private equity reinvestments in 2026, also aligned with the fund’s long-term de-risking strategy.
Why It's Important?
This strategic shift by CMERS highlights a broader trend among pension funds to manage and potentially reduce portfolio risk, especially in alternative assets like private equity. The move to decrease private equity allocation to approximately 4% by 2035, through a de-risking glidepath, signifies a cautious approach to investment management. While the private equity program has shown strong longer-term investment results, ranking in the second quartile for performance and diversified across four investment managers, CMERS prioritizes gradually reducing overall portfolio risk as its funded status improves. This strategy avoids an immediate sale of existing private equity holdings, which could disrupt the market, and instead allows the portfolio's net asset value to decline naturally as investments mature. This decision could influence other pension funds to re-evaluate their own private equity allocations and risk management strategies, potentially leading to a more conservative investment landscape for institutional investors.
What's Next?
CMERS plans to pause new private equity commitments in 2027, with the decision to be revisited annually. The fund's long-term goal is to reduce its private equity allocation to approximately 4% by 2035. This will involve a gradual reduction in the portfolio's net asset value as existing investments mature and distributions are returned to the fund. Callan will continue to review commitment pacing annually to assess if additional investments are warranted under the de-risking plan. The pension fund's private equity managers, including Abbott Capital Management, Mesirow, Neuberger Berman, and Apogem Capital, will likely see their roles evolve as CMERS moves towards a more conservative investment mix. This ongoing re-evaluation and gradual reduction strategy will be closely watched by other institutional investors and the private equity industry.
Beyond the Headlines
The decision by CMERS to reduce its private equity exposure, despite strong past performance, reflects a deeper institutional concern about long-term portfolio stability and risk management. This move suggests a potential shift in how large pension funds perceive the role of private equity within their overall investment strategy, moving away from aggressive growth towards more predictable, lower-risk assets as their funded status improves. The emphasis on a 'de-risking glidepath' rather than immediate divestment indicates a sophisticated approach to managing large, complex portfolios, aiming to minimize market impact while achieving strategic objectives. This could set a precedent for other public pension funds, influencing capital flows within the private equity sector and potentially leading to increased scrutiny of illiquid asset classes. The ethical dimension of ensuring long-term financial security for retirees, balanced against the pursuit of higher returns, is central to such decisions.
