S.C. sets up independent firm for state pension fund

Marketplace Staff Sep 28, 2010

S.C. sets up independent firm for state pension fund

Marketplace Staff Sep 28, 2010


Kai Ryssdal: If you really want to get rich in the markets, one way to do that is to put your money in a private equity fund. ‘Course — there’s a catch. You usually have to have a pretty sizeable bankroll to start with before those funds will even let you in the door. South Carolina’s state pension fund does have a couple of billion dollars to play with, but they are going to do something a little bit different. They’re going to start their own private equity fund, see if they can’t beat the market themselves.

Peter Lattman wrote aboutthe story in the New York Times today. Good to have you with us.

Peter Lattman: Thanks for having me.

RYSSDAL: Why does South Carolina feel the need to do this?

LATTMAN: Well it’s interesting and a bit surprising that this has come from South Carolina, which you don’t normally think of as pioneering in the arcane world of pension fund management. Typically, you think of CalPERS, the big California pension fund, or even Texas Teachers. But South Carolina has made a decision, that’s somewhat outside out of the box here, to set up their own investment firm and to take money management into their own hands rather than handing it to other firms to manage.

RYSSDAL: Do they think they can do it better or are they just looking to save money, because as we know, private equity firms — they take a lot off the top before you get your profit back.

LATTMAN: Right. The first idea is to save money, so the fees that these private equity funds charge are, some might say, rapacious. I think the pension funds over the years have been scratching their heads saying, is it really worth it to pay all these fees when, after all, the returns over the past decade haven’t been great. So this CIO, the chief investment officer down there, I think he’s an intelligent guy, he’s an ambitious guy, and I think he’s saying to himself, well, if we can set up our own fund and hire our own people, not only can we save fees but perhaps we can also perform as well as some of these firms that we’ve been having manage our money.

RYSSDAL: They’re putting $5 billion into this, which is in absolute terms a lot of money, but in the world of private equity, it’s peanuts.

LATTMAN: That’s right. So look, this isn’t really going to make huge waves in the private equity world. But if this is looked at as an innovative approach, something out of the box, and if you start to have some of the bigger pension funds like CalPERS or New York Pension Fund — which is a $125 billion portfolio — if they look at this move and sa, “Hey, this isn’t a bad idea, let’s try that ourselves,” then you’re really going to see a ripple effect and that could have an effect on the private equity industry.

RYSSDAL: As we know, there are some people on Wall Street who used to do a lot of banking for a living; they’re now looking for jobs. Is South Carolina a place where they’re going to say, “Ooh, I want to go and work down there”?

LATTMAN: Someone said that to me yesterday, “Well if I could live on Kiawah Island and play golf all day, make it up to Charleston once a week, I’ll go right down there.” But that’s one of the big challenges, is going to be competing for talent. Because the idea is to charge less fees here in setting up this firm, they’re probably not going to be able to compete with the Blackstones and the Carlyles and the KKRs for talent. So while there is a decent job market out there in terms of people who are hiring, there’s a lot of people looking for work, it’s not clear that the idea of working of the South Carolina Pension Fund in Charleston or even in New York is going to compare to big fancy Wall Street job.

RYSSDAL: So here’s the payoff question: Are they going to be able to beat the returns that they’ve been getting? Are they smart enough to do that?

LATTMAN: I’m skeptical. There are some models outside of the United States where it has worked, but you know, these guys are expensive, the KKRs and Blackstones, but they’re also pretty good at what they do. So I think it’s going to be all in the execution and I think the jury’s still out on whether these guys can perform as well as the outside managers they’ve been dealing with.

RYSSDAL: Peter Lattman from the New York Times, writing in the paper this morning about South Carolina starting its own private equity fund. Peter, thanks a lot.

LATTMAN: Thanks Kai.

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