The San Bernardino (Calif.) County Employees Retirement System's investment committee is recommending a $45 million allocation to distressed debt and a $40 million investment in energy special situations funds. The recommendation will be made Nov. 2 and if the board approves the moves, the $5 billion fund will conduct a market survey for each asset class to check what strategies are available and who the best managers are, said James Perry, investment analyst. Searches could then follow during the first half and the plan would probably opt for funds of funds given the small size of its staff.
According to Money Management Letter, a CIN sister publication, San Bernardino first started investing in private equity in 2004. It already has just shy of $50 million in a distressed debt fund of funds with Siguler Guff & Co. and it uses the asset class along with mezzanine finance and secondaries to mitigate the J-curve effect of private equity investment. The fund is considering a first foray into private equity energy funds for diversification and to achieve real returns over a 10-year cycle. Perry compared energy to timber as investors can hold onto these assets to ride out any short-term market volatility. During a bad market for timber, "let it grow," and then when prices improve, "cut it down," he said. "It's a no brainer."
The fund is considering relaxing the long-only constraint for its domestic equity managers and is also discussing allowing its bond managers more latitude. Using leverage with an asset class such as bank debt could achieve 10-12% returns at a lower cost than investing in unlevered equity, Perry pointed out. He wants to take advantage of the full range of managers' skill sets. Additional flexibility is unlikely to lead to bond manager searches. "We have a very good line-up of managers and we're going to be talking to them first," Perry said. New England Pension Consultants advises the plan.