Board Meeting Agenda Wednesday, May 26, 2021, 9:30 a.m.* I. Minutes (Voting Item) II. Executive Director/Chief Investment Officer Report A. PRIT Fund Performance and Markets Update B. Organizational Updates III. PRIM’s Investment Equity Diversity Program Update – “The FUTURE Initiative” IV. Investment Report A. Strategy Group 1. Portfolio Completion Strategies Performance Summary 2. Power Pacific China A-Shares Absolute Return Managed Account (Voting Item) 3. Risk – Benchmarking Review (Voting Item) B. Public Markets 1. Performance Summary 2. Other Credit Opportunities: New Investment Recommendation: Oaktree Fund-of-One (Voting Item) C. Private Equity 1. Performance Summary and Cash Flows 2. Commitment Summary 3. Follow-on Investment Recommendations: (Voting Item) a. Hellman & Friedman Capital Partners Fund X, L.P. b. TA Associates XIV, L.P. and TA Select Opportunities Fund II, L.P. c. Providence Strategic Growth Fund V, L.P. d. Insight Venture Partners XII, L.P., Insight Partners XII Buyout Annex Fund, L.P., and Insight Partners Fund X Follow-On Fund, L.P. e. Quad-C Partners X, L.P. f. Thompson Street Fund VI, L.P. 4. Follow-on Investment Recommendation: Flagship Pioneering Fund VII, L.P. (Voting Item) D. Real Estate and Timberland Performance Summary V. Finance & Administration Report A. Draft Fiscal Year 2022 Operating Budget (Voting Item) B. Issuance of a Request for Proposals (RFP) for Proxy Voting Services (Voting Item) C. Legal/Legislative Update D. Other Matters: 1. March 2021 PRIM Operating Budget 2. Travel Report 3. Client Services *This meeting will be held in accordance with the provisions of the Governor's Order of March 12, 2020 "Suspending Certain Provisions of the Open Meeting Law", and all members of the Board will participate remotely via audio/video conferencing, and public access to the deliberations of the Board will likewise be provided via telephone.
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Appendices A. Minutes of the PRIM Board Meeting on February 24, 2021 B. PRIT Fund Performance Report March 31, 2021 C. BNY Mellon Gross of Fees Performance Report March 31, 2021 D. PRIM’s Investment Equity Diversity Program Update – “The FUTURE Initiative” E. Power Pacific China A-Shares Presentation F. Benchmarking Review Presentation G. Verus Non -- U.S. Equity Benchmark Recommendation Report H. Verus Private Equity Benchmark Recommendation Report I. Real Estate and Timberland Performance Charts J. Draft Fiscal Year 2022 Operating Budget K. March 2021 PRIM Operating Budget L. Travel Report
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I. Minutes (Voting Item) The minutes of the February 24, 2021, PRIM Board meeting are attached as Appendix A. II. Executive Director/Chief Investment Officer Report A. PRIT Fund Performance and Markets Update The PRIT Fund assets under management (AUM) of $90.1 billion for the quarter ended March 31, 2021 was an all-time high. The PRIT Fund gained 30%, net of fees, over the one-year period, which equates to an investment gain of $21 billion. Moreover, the one-year return was more than 4% (approximately $3 billion) above the benchmark return, which is an indication that our managers are doing a very good job. All recent time periods - the 3- , 5-, and 10-year returns--were all strong and above benchmark. Returns during all time periods exceeded the actuarial rate of return requirement of 7.0%. We are extremely proud to have added $21 billion to the pension fund in a period we will not soon forget, a period in which so many in the world and in our communities have suffered. Our strong return should be viewed as pension security for our beneficiaries in this time of so much struggle and uncertainty, and we believe it also goes a long way to shore up the finances of the entire Commonwealth after a very difficult year. The carefully constructed PRIT Fund continues to perform well in both strong periods, like the last year, but more importantly, in weak markets, too, like we had a year ago with the onset of the COVID-19 pandemic. For the one-year period ended March 31, 2021: • Global Equities was the best performing sleeve, up 58.5% (net of fees). • Private Equity achieved one of its highest annual returns in PRIM’s history, up 35.9% (net). • Value-added fixed income (Emerging Markets Debt, High Yield Bonds, and Bank Loans) was up 17% (net). • Portfolio Completion Strategies (Hedge Funds, Real Assets) was up 14.1% (net). • Real Estate was up 9.3% (net) Total PRIT Fund Returns (Gross of Fees) Annualized Returns as of March 31, 2021 35.0% 30.4% 30.0% 25.8% 25.0%
20.0%
15.0% 10.2% 10.9% 8.7% 9.6% 9.0% 10.0% 7.5% 4.6% 5.0% 1.4% 1.3% 1.5% 0.0% 1 Year 3 Years 5 Years 10 Years Total Fund Return Total Core Benchmark Value Added
Source: BNY Mellon. Total Core Benchmark includes private equity benchmark.
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PRIT Performance by Asset Class (Gross of Fees) Annualized Returns as of March 31, 2021
Source: BNY Mellon. Totals may not add due to rounding. *Benchmark is actual performance. **Hedge Fund returns are net of fees.
PRIT Fund Periodic Table of Returns (Gross of Fees) as of March 31, 2021 1 Year 3 Year 5 Year 10 Year GLOBAL EQUITY PRIVATE EQUITY PRIVATE EQUITY PRIVATE EQUITY 58.9% 24.5% 22.6% 19.8% PRIVATE EQUITY GLOBAL EQUITY GLOBAL EQUITY GLOBAL EQUITY 37.8% 11.9% 13.7% 9.7% VALUE-ADDED FIXED REAL ESTATE REAL ESTATE REAL ESTATE INCOME 6.8% 7.1% 9.6% 17.7% PORTFOLIO COMPLETION VALUE-ADDED FIXED VALUE-ADDED FIXED CORE FIXED INCOME STRATEGIES INCOME INCOME 5.8% 14.3% 6.7% 5.4% VALUE-ADDED FIXED PORTFOLIO COMPLETION REAL ESTATE CORE FIXED INCOME INCOME STRATEGIES 9.8% 4.8% 5.0% 5.0% PORTFOLIO COMPLETION TIMBER TIMBER TIMBER STRATEGIES 5.4% 4.3% 4.7% 3.6% PORTFOLIO COMPLETION CORE FIXED INCOME TIMBER CORE FIXED INCOME STRATEGIES (1.8%) 2.4% 3.8% 4.2% Source: BNY Mello
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More detailed PRIT Fund performance reports are included in the Board package as Appendix B and Appendix C. Markets Markets are up more than 90% since the March 2020 lows, and economic news is encouraging. Still, we adhere to our fundamental two core beliefs at PRIM: (1) nobody can predict the future, so we do not try, and (2) nobody can predict the direction of financial markets, so we do not try. Our mission at PRIM is to construct a portfolio with components that will perform well no matter what the future holds. Nevertheless, we are keeping the following market themes in mind as we move forward: 1. Recent months showed evidence of the start of a sustainable rebound in economic activity that could last for several years as the new Administration seems intent on utilizing its slim majority control of Congress to advance its stimulus measures. The stimulus measures will last for years and it is possible that the economy and the markets will benefit well into the future. 2. The Department of Treasury and the Federal Reserve Bank seem to be acting as a team and are not worried about what they describe as “transitory inflation”. As a result, they will likely keep the Fed Funds rate low and bond purchases ongoing well beyond the time when inflation stays above 2%. 3. The markets are broadening beyond the growth stocks that drove returns for many quarters. In fact, value stocks outperformed growth stocks in Developed International Markets this last period. There is a good chance that the markets will continue to broaden as the recovery takes hold. 4. The main risk to the strength of the markets is that the virus flares up again, causing the economy to stagger despite the stimulus. 5. There is a risk that supply chain shortages and higher commodity prices will dampen expected growth. 6. There is a risk that even though the Fed has pledged not to raise rates, investors will begin to factor in non-transitory inflation and worse, much higher rates, causing the markets to decline. We are confident that the PRIT Fund will perform well in a variety of potential outcomes.
B. Organizational Updates The FUTURE Initiative In January, “An Act Enabling Partnerships for Growth” was signed into law, which includes a provision to increase the diversity of PRIM’s investment managers and contractors to at least 20% and increase access for minorities, women, and disabled investment managers and business partners. Treasurer Goldberg and her team created the legislation and strongly advocated for its passage. They worked directly with Representative Chynah Tyler and Senator Paul Feeney, who filed the bill. The new legislation is an important new extension of the important diversity and inclusion work PRIM has been doing for several years during Treasurer Goldberg’s tenure to further increase access for minorities, women, and people with disabilities. These efforts are focused both internally - on our own staff - and also externally as we seek diverse investment managers and vendors. The new law sets goals and formalizes procedures and reporting requirements for investment managers and other vendors. PRIM recently announced an important new initiative called the FUTURE Initiative, which we believe to be both comprehensive and industry leading. The FUTURE Initiative provides a new and
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improved pathway for emerging diverse managers to work with PRIM. Specifically, the FUTURE Initiative targets diverse managers with a short track record and/or small AUM. We believe that the FUTURE Initiative will strengthen PRIM’s leadership position in the industry with regard to diversity and inclusion practices, similar to our initiatives and innovations in other important areas of our investment program that have led to PRIM’s recognized strength and leadership. Over the last five years, PRIM has successfully increased the use of diverse managers.
• PRIM is in the top 10 (#6) of peer pension plans with assets managed by diverse managers.1 • $5.3 billion, or nearly 6% of the PRIT Fund, is allocated to diverse investment managers, up from $1 billion five years ago. This is in an industry where only 1.5% of all managers are considered diverse. • $2.4 billion, or approximately 5% of PRIM’s Public Markets portfolio is managed by diverse investment managers. • $1.5 billion, or approximately 20% of PRIM’s Hedge Fund portfolio is managed by diverse investment managers. • $1.4 billion, or approximately 11% of PRIM’s Private Equity portfolio is managed by diverse investment managers. • Though his membership on the CFA Institute’s Diversity and Inclusion Advisory Committee, PRIM’s ED/CIO worked to draft the CFA Diversity and Inclusion Code of Conduct, which will be released in the coming months. PRIM expects to be among the first founding adopters of the CFA’s Diversity and Inclusion Code of Conduct and broad industry participation is expected.
Staffing Successes • We are the leanest pension fund in the country in terms of employees relative to assets under management, and we continue to grow staff as our assets grow under Board approved plans. • In FY 2020, we hired nine new full-time employees, all were diverse in terms of gender, race or both.
1 Pensions and Investments, February 8, 2021
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• The entire class of 2020 interns (eight total) were diverse. • In FY 2021, we have hired six new employees, and five are diverse. • Currently, six of the eight interns on staff are diverse. • PRIM’s total workforce diversity increased to 66% currently, up from 42% in FY 2018. • PRIM’s senior management is 33% diverse, increasing from 9% in FY 2018, and PRIM’s female senior management increased from 7% in FY 2018 to 26% year-to-date in 2021. Project SAVE Update The spirit of Project SAVE is deeply embedded in our everyday thinking and we have more than doubled the original goal of $100 million in annual cost savings and value enhancing activities. Project SAVE is now running more than $200 million. Recently, a few senior members of our investment staff working closely with the finance team have uncovered three noteworthy opportunities that were not immediately obvious to any of our consultants or business partners, rather these outstanding staff members were able to identify these opportunities because of their many years of relevant experience in the industry. This is a ringing endorsement of our efforts to not only hire junior-level employees, but to also add depth and senior experience to the team – there is no substitute for industry knowledge and firsthand experience. First, Jay Leu and the Real Estate team are working on an enhanced leverage program that will reduce our borrowing costs by nearly $7 million annually. We are lucky to have Jay on the team and his years of fixed income practical experience. Next, Andre Clapp and David Gurtz developed an internal crossing program for stock trades throughout the Public Markets portfolio that will save approximately $3 million annually in trading costs. They also renegotiated some Public Market fees that will result in more than $5 million in annual savings. These are the types of activities that occur daily at PRIM, and they may go unnoticed to the outside, but it highlights that experience matters and that in just a few, unique brain synapses, synapses that happen because of years of practical experience, these employees were able to identify these huge and important cost savings opportunities. The entire PRIM team has this Project SAVE DNA in their blood, and these are some of the more recent examples of the fact that we leave no stone unturned. We value a basis point of cost savings more than a basis point of return for the simple fact that we can control it and the savings compound year after year. Staffing Updates PRIM announced changes to the Client Services team shortly after Paul Todisco’s retirement at the end of March. Francesco Daniele was promoted to Director of Client Services. Francesco joined PRIM in December of 2016, with 20 years of experience in finance and administration. We are fortunate that Paul recruited, hired, trained, and mentored Francesco over the last four years. Prior to joining PRIM, Francesco was a Director at the Debt Exchange, assisting global financial institutions actively managing their core and non-core loan portfolios. Francesco began his career as a Fixed Income and International Equities Analyst at Independence Investment Associates. He has a bachelor’s degree in international business and finance from Northeastern University and an MBA from Suffolk University. He holds the Investment Foundations™ Certificate from the CFA Institute. Emily Green was promoted to Senior Client Services Analyst. Emily joined PRIM in 2019 as a Client Services Analyst and has quickly become a valuable asset to the team. Before joining PRIM, Emily was with Stevens, Inc., where she was Vice President of Institutional Equity Sales. Emily graduated from Fairfield University with a bachelor’s degree in marketing and a minor in art history.
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Laura Strickland joined PRIM as a Senior Client Services Officer. Laura has 20 years of finance and client service experience. Most recently, Laura was a Director of Business Development and Relationship Management at DDJ Capital Management in Boston, where she managed institutional relationships and was responsible for business development and consultant relations in the Midwest and Northeast United States. Prior to that, Laura was a Vice President and Relationship Manager at Standish Mellon Asset Management. She has a Bachelor of Science in Finance and an MBA from DePaul University. Please join me in welcoming Laura and congratulating Francesco and Emily on their promotions. We are very confident that the Client Services team will continue to seamlessly deliver the outstanding service our clients are used to, well into the future. It is a very strong team. Colleen Nulty joined PRIM as a Corporate Accountant on the Finance team, reporting to Dan Eckman. Colleen most recently worked as an Accountant at Education First in Cambridge, MA. Prior to that, Colleen was a Marketing Assistant at Boston University. Colleen holds a Bachelor’s degree in Accounting from Suffolk University and a Master’s degree in Accounting also from Suffolk University. George Defina joined PRIM as a Senior Investment Officer on the Research team, reporting to Maria Garrahan. George brings close to 20 years of investment industry experience, including 12 years at Mellon, Inc. (formerly The Boston Company) as a Senior Quantitative Analyst and Portfolio Manager. Prior to that, George served as a Quantitative Analyst, Developer, and Manager at Independence Investment Associates. George has designed, managed, and developed data systems throughout his career, and his expertise will be valuable to our internal data infrastructure project and other research initiatives. George holds a Bachelor of Science in Computer Science and Engineering from the University of Connecticut. III. PRIM’s Investment Equity Diversity Program Update – “The FUTURE Initiative” In January 2021, the Act Enabling Partnerships for Growth bill was signed into law that sets goals to increase the diversity of PRIM’s investment managers and other vendors to at least 20% and formalizes procedures and reporting requirements. This legislation is a new extension of the important diversity and inclusion work PRIM has been doing to further increase access for minorities, women, and people with disabilities. Staff will present an update on PRIM’s Investment Equity Diversity Program, including PRIM’s “FUTURE Initiative”, which will build upon PRIM’s established policies and efforts on diversity, equity, and inclusion, and outline next steps to remove unintended barriers for diverse managers to manage capital for PRIM. These expanded initiatives include the launch of an emerging diverse manager program across all asset classes and a new page on PRIM’s website that allows all investment managers to submit information. The presentation is attached as Appendix D. IV. Investment Report A. Strategy Group 1. Portfolio Completion Strategies - Performance Summary 2. Power Pacific China A-Shares Absolute Return Managed Account (Voting Item) Parent Firm: Power Corporation of Canada (“Power Corp” or “the Parent”) Manager Name: Power Pacific Investment Management (“Power Pacific” or “the Manager”) Strategy Name: China A-Shares Absolute Return (“the Strategy”) Parent Firm AUM: $190 billion Strategy AUM: $850 million Recommendation: Initial allocation up to $200 million Benchmark: MSCI China A Index
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Recommendation PRIM staff and the Investment Committee recommend (unanimously) to the PRIM Board that the Board approve an initial allocation of up to $200 million to the Power Pacific China A-Shares Absolute Return Separately Managed Account, subject to satisfactory contract negotiations. The Strategy seeks to generate attractive risk-adjusted returns via investing in well-managed Chinese companies with robust financials and growth potential. Investment Strategy Overview The Manager is a fundamental-based, bottom-up focused, long-term, absolute return investor. The team seeks to invest in well-managed companies with robust financials and growth potential at a fair price. The Manager has a disciplined approach of moving to cash when market opportunities are insufficient. Typical time horizon when selecting stocks is 3-5 years, although the Manager can hold for longer or shorter periods depending on whether the opportunity is still attractive or not. Firm Overview and Key Persons Power Pacific Investment Management is a boutique investment management firm 100% owned by Power Sustainable Capital, an alternative asset management firm focused on sustainability investing. Power Sustainable Capital is a subsidiary of Power Corporation of Canada, which is a financial conglomerate holding a variety of businesses, including insurance, retirement, wealth management and investment management. Power Corporation of Canada is publicly listed in Toronto, Canada. Power Pacific has a team splitting between Shanghai, China, and Montreal, Canada (20 and 6 professionals, respectively). Investment and operation functions are mostly performed from the Shanghai office, while the Montreal office normally performs oversight and business development functions. Power Pacific’s operations in China started in 2005, when the team exclusively managed Power Corp’s investment in China A-Shares; the investment was operated under a Qualified Foreign Institutional Investor (“QFII”) license. In 2018, in order to attract external capital, the team was incorporated as Power Pacific Investment Management, and obtained the regulatory licenses to act as a stand-alone investment fund manager. Biographies of selected team members are below: Jun Li, Chief Investment Officer Ms. Li joined Power Pacific in 2011 and currently serves as Chief Investment Officer of Power Pacific (Shanghai) Investment Management. Before joining the firm, Ms. Li was Vice President at Bain Capital, where she focused on leveraged buyouts and direct investments in leading Chinese companies. Prior to that, she worked for CITIC Capital and McKinsey & Co. She received a BS degree from Fudan University and an MBA from Harvard Business School. Eoin Ó hÓgáin, Chief Executive Officer Mr. Ó hÓgáin joined Power Pacific in 2016 and currently serves as the Chief Executive Officer and Chief Investment Officer of the firm. He previously worked for State Street Global Advisors in Dublin, Ireland, McKinsey & Company in New York City and Morgan Stanley in London. He received a Bachelor of Business Studies and French degree with first class honors from Trinity College Dublin and an MBA with High Distinction from the Harvard Business School. In addition, he is a CFA charter holder. Randy Zhou, Head of Research Mr. Zhou joined Power Pacific in 2018 and manages the research team as Head of Research, focusing on optimizing research processes and developing investment strategies. Before joining
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the firm, he was a Portfolio Manager at Giant Redwood, investing in China A/H-shares, China ADRs and US stocks with significant China exposure. Prior to that, he worked for Cathay Fortune, Goldman Sachs, UBS and BOCI. He received a BS degree from Shanghai University of International Business and Economics and an MBA degree from University of Calgary. Violet Liu, Chief Compliance Officer & Chief Operating Officer Ms. Liu joined Power Pacific in 2018 and currently serves as the Chief Compliance Officer of Power Pacific and Chief Operating Officer of Power Pacific (Shanghai) Investment Management. She focuses on daily operations, financial management, investor relations and reporting, compliance, IT, and vendor/partner management. She received a BS degree from Shanghai Jiaotong University and a MS in Accountancy from University of Notre Dame, where she graduated cum laude. She is a CPA and a CFA charter holder. Portfolio Construction The Manager creates a concentrated portfolio. Allocations to each position are dependent on a number of factors including, but not limited to extensive due diligence and conviction in the company, target price, correlation across positions, and perceived downside risk. There are no sector limits, but CIO considers sector diversification when constructing the portfolio and targets a diversified contribution from each of the core sectors. Instruments Traded The Manager trades listed public equities on China onshore A-shares market and does not use derivative instruments such as options, futures, or swaps. The Manager does not invest in unlisted or illiquid securities. Sourcing and Investment Process The Manager is a fundamental, bottom-up stock picker with private equity like due diligence approach. The Strategy focuses on five core sectors: Consumer Staples, Consumer Discretionary, Technology, Healthcare, and Industrials. The research goal is to find long-term winners in each sector or subsector. The team’s deep connection to the local market and thorough research process enables them to better understand industries and companies in China’s onshore market. Sector leaders together with analysts conduct deep primary research to fully understand the growth potential of the industry, the long-term competitive edge of target business, and the quality of the management team. Important catalysts, including new product launches and policy changes, will also be studied. Researchers will meet the management teams, suppliers and customers along the value chain as well as competitors in the industry to draw a more complete picture of the business. In the period from 2016 to 2020, the Manager averaged 635 hours of research calls annually and conducted 415 onsite company visits, including management meetings. CIO participates in management meetings regularly and attends channel checks and company visits. Team members share their latest research on a regular basis. Based on all information, researchers triangulate the value of a business using multiple methods. The Manager will review the fundamentals and valuation of companies regularly or when large price movement or important corporate events happen, and decide whether to hold the position for longer term or exit. Risk Management and Operational Review Power Pacific has established a Risk Management Policy which defines its risk management framework, the key principles as well as the responsible parties with respect to its implementation. The CEO, under the oversight of the Board of Directors, is responsible for
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implementing and maintaining Power Pacific’s risk management framework, but he relies on senior staff, including the CCO and the General Counsel, as a designate for identifying, assessing, and documenting certain categories of risks and related mitigating controls. The Manager undertakes an annual risk assessment covering investment, operational, and cyber risk in addition to regulatory compliance and governance. The results will be presented by the CEO to the Board of Directors. With respect to investment risk management, Power Pacific, at the recommendation of the Advisory Committee, has established a Policy on Investment Selection Process and Governance. The Policy includes the position sizing limits and sets the required increased levels of due diligence, approval and monitoring for higher levels of portfolio exposure on a particular security. The rules have been codified into the Manager’s trading system to enforce investment guidelines on entry and exit price discipline and position sizing. Any proposed transactions that violate the trading rules are rejected or require further approval from the CIO. The investment risk is also managed through an in-depth research process and careful thesis review by CIO and the research team. The team focuses on investing in companies with strong fundamentals and spends considerable efforts conducting deep research on potential investment opportunities before making any initial allocation. The Committee will monitor investment performance and make recommendations to the CIO with respect to any issue that should be brought to their attention. Each investment in the portfolio is also regularly reviewed by the investment team. Any irregular stock movements will immediately trigger reviews on the company and the thesis. Capital could be moved to cash when the investment team believes that there is a lack of strong, appropriately valued investment opportunities. Power Pacific has consistently ranked top quartile among peers in terms of risk-adjusted metrics such as Sharpe Ratio and Sortino Ratio. PRIM’s presentation is attached as Appendix E. 3. Risk – Benchmarking Review (Voting Item) PRIM staff and Verus Investments, PRIM’s benchmark consultant, will present benchmark recommendations for Developed International and Emerging Markets Equities and Private Equity. These recommendations include: • Utilize a single asset class benchmark for Developed International (MSCI World Ex-U.S. IMI) instead of a combination of three benchmarks; • Utilize a single asset class benchmark for Emerging Markets Equities (MSCI Emerging Markets IMI) instead of a combination of two benchmarks; • Utilize a single asset class benchmark for non-U.S. equities (MSCI ACWI Ex-U.S. IMI) instead of a combination of two benchmarks; • Add a private equity peer universe benchmark in addition to the current benchmark (Russell 3000* + 3%) to address the time-period mismatch with the current benchmark. PRIM staff’s presentation is attached as Appendix F and Verus Investments’ recommendations memorandum are attached as Appendices G and H. B. Public Markets 1. Performance Summary
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2. Other Credit Opportunities: New Investment Recommendation: Oaktree Fund-of-One (Voting Item) Manager Name: Oaktree Capital Management, LLC (“Oaktree”, “the Manager” or “the Firm”) Fund Name: Oaktree Fund-of-One (the “Vehicle”) Manager Size: $148 billion Strategies: Real Estate Debt and European Capital Solutions Recommendation: Initial allocation of up to $250 million Recommendation PRIM staff and the Investment Committee recommend (unanimously) to the PRIM Board that the Board approve an initial allocation of up to $250 million to the Oaktree Fund-of-One, as part of the Other Credit Opportunities (“OCO”) allocation, subject to satisfactory contract negotiations. The Vehicle will invest alongside two of Oaktree’s funds, Real Estate Debt Fund and European Capital Solutions Fund. If approved, Oaktree will be added to the OCO co- investment program in accordance with the Board-approved PCS and OCO co-investment guidelines in assessing the opportunities. PRIM has invested in Oaktree’s flagship distressed fund series since 2004. However, PRIM’s focus has shifted to performing debt strategies through an "all-weather" approach, which will ensure capital is deployed across market cycles. PRIM and Oaktree have worked together to identify two specific performing credit strategies that are accretive to PRIT Fund performance and offer exposure to sectors like real estate debt, where PRIM currently has limited exposure. PRIM staff is recommending this investment primarily for the following reasons: • Ability to allocate capital to two of Oaktree’s high-performing strategies. • Utilize a Fund-of-One structure that offers improved flexibility and control relative to traditional fund investment. • Add exposures to the PRIT Fund that are currently underrepresented. • Oaktree’s deep bench of experienced investment professionals across US and major European countries, offers comprehensive regional sourcing capabilities. • Opportunistic and value-oriented approach to real estate debt investing that offers downside protection through hard asset-backed investments and strong underwriting. • Achieves OCO objectives like risk-adjusted returns comparable to PRIM’s Value-Add Fixed Income portfolio and adding unique exposures to credit sectors in which PRIM is under- allocated. Sponsor Summary Founded in 1995, Oaktree Capital Management is a global alternative investment management firm that focuses on credit strategies. The founders of the firm, Howard Marks, Bruce Karsh, Sheldon Stone, Larry Keele, and Richard Masson worked together at the Trust Company of the West for more than ten years. Oaktree currently has approximately $148 billion under management across all investment strategies. Strategies include distressed opportunities, high yield, convertibles, private debt, private equity, real estate, and listed equities. In general, the firm uses a value approach to investing in less efficient and alternative markets. Oaktree has approximately 1,000 employees, of which 300 are investment professionals, with offices in 19 cities and 14 countries. Brookfield Asset Management acquired a majority interest in Oaktree in 2019, although Oaktree continues to operate as an independent business within the Brookfield family.
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Case for Real Estate Debt With relatively low correlation to other asset classes, stable and predictable income returns, and accretive returns compared to other fixed income investments, commercial real estate debt investments may be appealing to institutional investors. Contractual repayment coupons, defensive positioning in the capital stack, and prepayment restrictions help stabilize returns and lower the volatility of commercial real estate debt. Risk-adjusted returns of private commercial real estate debt compare favorably to other fixed income strategies. Commercial real estate loans are typically used to finance the acquisition, refinancing or recapitalization of commercial properties, which include multifamily, office, industrial, retail and hospitality properties. Loans range in size, duration, and structure. Because equity is subordinate to the debt, the debt positions are in a more protected position in the capital stack relative to equity. Different debt positions in the capital stack have greater or lesser repayment priority and offer differentiated risk-return metrics. See chart below.
Private Debt Capital Stack Examples 100% 80% 60%
LTV 40% 20% 0% Whole Loan B-Note Mezzanine Preferred Full Capital Loan Equity Stack
Senior Mortgage B-Note Mezzanine Preferred Common Equity Equity
Summary of Proposed Strategies The Vehicle will invest alongside two of Oaktree’s Fund: Real Estate Debt Fund and European Capital Solutions. PRIM will have the ability to set investment parameters to limit exposure to certain property types and markets. The objective is to maintain diversification of a fund with flexibility to tailor exposures as deemed appropriate. The Vehicle will also have access to co- investment opportunities from each strategy, with veto rights. Oaktree Real Estate Debt Fund (“RED”) Based in Los Angeles, Oaktree’s Real Estate Debt team resides within the broader Real Estate team. The Real Estate group is comprised of 59 investment professionals, managing $12 billion across three product lines: Real Estate Opportunities (equity and equity-like risk), Real Estate Debt, and Real Estate Income (open-ended fund). Justin Guichard, together with over 10 other team members, are dedicated to the Real Estate Debt strategy, with support from the broader Real Estate team. The RED team focuses on performing real estate debt in the US, including mezzanine loans, first mortgages, structured credit, and corporate debt collateralized by a diversified mix of property types. Oaktree will target both public and private real estate debt opportunities with exposure to both senior and subordinate positions. Their flexible investment strategy allows for a relative value approach.
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European Capital Solutions (“ECS”) Based in London, UK, Oaktree’s European Capital Solutions team resides within the broader European Principal group. The European Principal group is comprised of approximately 50 full- time professionals and 13 external advisors dedicated to on-the-ground sourcing. The team manages about $7 billion across two product lines: European Principal Finance (equity and equity-like risk) and European Capital Solutions. Nael Khatoun is dedicated to the European Capital Solutions strategy, sharing sourcing and underwriting resources with the broader European Principal team. The strategy distinguishes itself from its peers in the European market by targeting unsponsored opportunities and deploying smaller loans. They may provide senior, uni-tranche, or mezzanine debt to performing, unsponsored borrowers. The team invests on a sector-agnostic basis, targeting opportunities with clear asset-backed collateralization. As a result, the portfolio is primarily collateralized by real estate. The credit provided is typically used for asset development or redevelopment, debt restructurings, add-on acquisitions or buyouts of minority investors. A wide network of senior professionals is leveraged to maintain coverage across Europe. Oaktree’s European team is experienced in hands-on management; however, the strategy does not target distressed opportunities and relies on the downside protection of the bespoke contracts bilaterally negotiated by Oaktree’s in-house legal team. C. Private Equity 1. Performance Summary and Cash Flows Private Equity Performance Summary and Cash Flows.
PRIM Board Private Equity Portfolio Performance as of March 31, 2021 1 Committed Contributed 2 Distributed Market Value Total Value Net IRR 3 25,798,410,522 21,859,752,943 26,640,234,951 12,137,565,522 38,777,800,473 13.95% 1 Excludes Alternative Fixed Income and Private Natural Resources partnerships. 2 Contributions include fees. 3 Net IRR since inception, as calculated by Hamilton Lane’s Portfolio Reporting System.
2021 Cash flows 1 2 Quarter Contributions Distributions Net Cash Flow 31-Mar-21 508,749,590 611,260,816 102,511,226 TOTAL $ 508,749,590 $ 611,260,816 $ 102,511,226 1 Excludes Alternative Fixed Income and Private Natural Resources partnerships. 2 Contributions include fees.
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2. Commitment Summary PRIM Private Equity 2021 Investment Summary (in millions) *Denotes existing PRIM relationship Partnership PRIT Commitment Approved at the February 24th Board Meeting JMI Equity Fund X* $80 Thomas H. Lee Equity Fund IX* $200
Total $280 2021 Investment Plan $2,100 - $2,700
3. Follow-on Investment Recommendations: (Voting Item) PRIM staff and the Investment Committee recommend (unanimously) to the PRIM Board that the Board approve the following commitments to these follow-on private equity investments: • Up to $350 million to Hellman & Friedman Capital Partners Fund X L.P. (“Fund X”); • Up to $350 million to TA Associates XIV, L.P. (“TA XIV”); • Up to $115 million to TA Select Opportunities Fund II, L.P. (“Select Opps II”); • Up to $175 million to Providence Strategic Growth Fund V, L.P. (“Fund V”); • Up to $150 million to Insight Venture Partners XII, L.P. (“Fund XII”); • Up to $50 million to Insight Partners XII Buyout Annex Fund, L.P. (“Buyout Annex Fund”); • Up to $75 million to Insight Partners Fund X Follow-On Fund, L.P. (“Fund X Follow-On Fund”); • Up to $175 million to Quad-C Partners X, L.P. (“Quad-C”); • Up to $150 million to Thompson Street Fund VI, L.P. (“Fund VI”) a. Hellman & Friedman Capital Partners Fund X, L.P. Manager Name: Hellman & Friedman Fund Name: Hellman & Friedman Capital Partners Fund X, L.P. Manager Size: $53.3 billion Fund Size: $20 billion Recommendation: Commitment of up to $350 million PRIM has invested in seven prior Hellman & Friedman Capital Partners (“H&F”) funds since 1995. H&F’s senior team has an average tenure of 18 years at the firm. All of H&F’s funds are at or near Cambridge Associates’ first quartile for fund performance. H&F targets buyouts of large businesses in North America and Europe in the software, financial services, business & information services, healthcare, internet & media, energy & industrials, and retail & consumer sectors. Executive Summary Benefits • Consistently strong performance and capital preservation o Prior funds perform well compared to industry benchmarks o Limited write off ratio demonstrates ability to protect downside • Disciplined investment approach that reduces risk
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o Seeks high-quality companies with durable competitive advantages o Portfolio exhibits strong growth characteristics • Highly talented organization with proven investment skill o Investment team has significant experience working together o Deep expertise in multiple industries and firm reputation provide access to highly sought-after businesses Risks As with all investments, there are risks and concerns that need to be considered, including illiquidity, exposure to an economic downturn, private equity market conditions, and firm- specific risks. Staff also reviewed the following risks and concerns associated with Fund X: • H&F Portfolio Construction: Fund X will target a limited number of portfolio companies, resulting in a concentrated portfolio. All else equal, smaller portfolios are more volatile. • Manager Risk: Fund X’s success relies on the performance of the firm’s investment professionals to execute its investment strategy. It may be more difficult to succeed if the firm is unable to attract and retain talent. Investment Overview Hellman & Friedman Capital Partners Fund X is a private equity fund being established to continue Hellman & Friedman’s successful approach of investing in buyouts of large companies located in North America and Europe. H&F Fund X will target $20 billion in aggregate commitments. We expect Fund X to have a final closing in May 2021. b. TA Associates XIV, L.P. and TA Select Opportunities Fund II, L.P. Manager Name: TA Associates Manager Size: $31 billion Fund Name: TA XIV, L.P. Fund Size: $10.5 billion Recommendation: Commitment of up to $350 million Fund Name: TA Select Opportunities Fund II, L.P. Fund Size: $1.5 billion Recommendation: Commitment of up to $115 million PRIM has invested in seven prior TA Associates (“TA”) funds since 1997. TA’s senior team has worked together for over 17 years. With the exception of TA X, all of TA’s funds are in Cambridge Associates’ first or second quartiles for fund performance. TA targets middle- market growth companies located in North America, Europe and Asia operating in technology, healthcare, financial services, consumer and business services sectors. Executive Summary Benefits • Consistently strong performance o Prior funds perform well compared to industry benchmarks o Portfolio exhibits strong growth characteristics • Strong sourcing capabilities
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• Provides access to middle-market, growth-oriented companies o Consistent with PRIM’s goal to increase exposure to middle-market buyouts • Highly talented organization with proven investment skill Risks As with all investments, there are risks and concerns that need to be considered, including, illiquidity, exposure to an economic downturn, private equity market conditions, and firm- specific risks. Staff also reviewed the following risks and concerns associated with TA XIV and Select Opps II: • Technology Market Risks: Similar to technology investing in publicly traded companies, private companies are exposed to technology market risks such as customer adoption, scalability, competition, and disruption from other technologies. • Manager Risk: The fund’s success relies on the performance of the firm’s investment professionals to execute its investment strategy. It may be more difficult to succeed if the firm is unable to attract and retain talent. Manager growth in assets could inhibit investment performance. • Business Combination Execution Risk: Bringing different businesses together involves uncertainty. Post-acquisition synergies might not materialize according to plan. Investment Overview TA XIV is a private equity fund being established to continue TA’s successful approach of investing in middle-market growth companies located in North America, Europe and Asia. TA XIV will target $10.5 billion in aggregate commitments. We expect TA XIV to have a final closing in May 2021. TA Select Opportunities Fund II is a private equity fund being established to continue the strategy of investing in a select group of high-performing TA portfolio companies. Select Ops II will target $1.5 billion in aggregate commitments. We expect Select Ops II to have a final closing in May 2021. c. Providence Strategic Growth Fund V, L.P. Manager Name: Providence Strategic Growth Capital Partners Manager Size: $6.0 billion Fund Name: PSG V L.P. Fund Size: $3.25 billion Recommendation: Commitment of up to $175 million PRIM has invested in two prior PSG funds since 2018. PSG V will target private equity investments in growth-oriented, lower middle-market companies in the software and tech- enabled services industries primarily located in the United States. Executive Summary Benefits • Buy-and-build strategy creates value and stages in capital to outperformers • Strong sourcing capabilities • Provides access to lower middle-market, growth-oriented companies
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• Portfolio exhibits strong growth characteristics • Highly talented organization with proven investment skill Risks As with all investments, there are risks and concerns that need to be considered, including, illiquidity, exposure to an economic downturn, private equity market conditions, and firm- specific risks. Staff also reviewed the following risks and concerns associated with Fund V: • Firm and Team Growth: PSG has grown rapidly since its founding in 2013. In 2019, PSG further expanded its platform by launching Providence Strategic Growth Europe. • Technology Market Risks: Similar to technology investing in publicly-traded companies, private companies are exposed to technology market risks such as customer adoption, scalability, competition, and disruption from other technologies. • Business Combination Execution Risk: Bringing different businesses together involves uncertainty. Post-acquisition synergies might not materialize according to plan. • Manager Risk: If PSG were to lose any of its senior investment professionals, it would likely disrupt the firm. Smaller firms are more reliant on their partners to run the business and invest the Fund than larger investment firms. Investment Overview PSG V will invest in growth-oriented, lower middle-market software and technology- enabled service companies located primarily in North America. Fund V is targeting $3.25 billion in aggregate commitments. We expect Fund V to have a final closing in May 2021. d. Insight Venture Partners XII, L.P., Insight Partners XII Buyout Annex Fund, L.P., and Insight Partners Fund X Follow-On Fund, L.P. Manager Name: Insight Partners Manager Size: $32 billion Fund Name: Insight Venture Partners XII, L.P. Fund Size: $11.5 billion Recommendation: Commitment of up to $150 million Fund Name: Insight Partners XII Buyout Annex Fund, L.P. Fund Size: $2.0 billion Recommendation: Commitment of up to $50 million Fund Name: Insight Partners Fund X Follow-On Fund, L.P. Fund Size: $1.3 billion Recommendation: Commitment of up to $75 million These funds provide the PRIT Fund with an attractive risk/return profile. Insight has a stable and highly experienced team and a strong and consistent track record. Executive Summary Benefits • Strong performing firm that invests in high growth software businesses o Returns are driven by portfolio companies’ strong growth characteristics
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o Valuable origination platform provides access to highly sought-after business • Highly talented and focused organization with proven investment skill o In-house consulting and operations professionals drive portfolio company improvements to accelerate growth Risks As with all investments, there are risks and concerns that need to be considered, including, illiquidity, exposure to an economic downturn, private equity market conditions, and firm- specific risks. Staff also reviewed the following risks and concerns associated with Fund XII, Buyout Annex Fund, and the Fund X Follow-On Fund: • Financing Risk: Many of the portfolio companies will require access to capital to finance growth initiatives and to fund operations. If the capital markets become unfavorable, then the risk of underperformance or even investment loss increases. • Technology Market Risks: Similar to technology investing in publicly traded companies, private companies are exposed to technology market risks such as customer adoption, scalability, competition, and disruption from other technologies. • Rapid Capital Deployment: Insight’s fund size has grown, and the fundraising pace has increased, which creates pressure on the organization to continue to generate outstanding investment performance while managing larger funds. Investment Overview Insight Partners is establishing Fund XII to continue Insight’s focus on investing in growth- stage software, software-enabled services, and internet businesses. Fund XII is targeting $11.5 billion in aggregate commitments. We expect Fund XII to have a first closing in May 2021. The Buyout Annex Fund is a vehicle dedicated solely to leveraged buyout investments and will co-invest alongside Fund XII. The Fund is targeting $2 billion in aggregate commitments. We expect the Buyout Annex Fund to have a first closing in May 2021. Insight’s Fund X Follow-On Fund will exclusively make follow-on investments in the existing portfolio companies of Insight Ventures Partners X, L.P. (“Fund X”), a current investment in PRIM’s private equity portfolio. The Fund will target $1.3 billion in aggregate commitments. We expect Fund X Follow-On Fund to have a final closing in Spring 2021. e. Quad-C Partners X, L.P. Manager Name: Quad-C Management, Inc. Fund Name: Quad-C Partners X, L.P. Manager Size: $1.6 billion Fund Size: $1.5 billion Recommendation: Commitment of up to $175 million PRIM has invested in five prior Quad-C Management, Inc. (“Quad-C”) funds since 2001. Quad-C’s senior team has an average tenure of 20 years at the firm. With the exception of Fund VII and Fund VII Co-investment Fund, all of Quad-C’s funds are either in Cambridge Associates’ first or second quartile for fund performance. Quad-C targets buyouts of middle- market businesses in the United States in the healthcare, business and consumer services, transportation and logistics, industrials, and specialty distribution sectors.
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Executive Summary Benefits • Strong performance within the middle-market • Disciplined investment approach that reduces risk o Maintains price discipline and uses conservative capital structure o Seeks companies with sustainable competitive advantages, high profit margins and return on capital • Highly talented organization with proven skill o Investment team has significant experience working together o Deep expertise in multiple industries provides differentiated access to investment ideas and ability to implement plans to add value to portfolio companies Risks As with all investments, there are risks and concerns that need to be considered, including, illiquidity, exposure to an economic downturn, private equity market conditions, and firm- specific risks. Staff also reviewed the following risks and concerns associated with Fund X: • Economic Downturn: Quad-C’s performance will likely suffer in an economic downturn. Quad-C invests in small businesses which are more vulnerable to declining revenues and earnings during a downturn. Smaller businesses, especially when leveraged, can be less durable. • Manager Risk: If Quad-C were to lose any of its partners, it would likely disrupt the firm. Smaller firms are more reliant on their partners than larger investment firms. • Firm Growth: Quad-C’s fund size has grown, which increases pressure on the organization to continue to generate outstanding investment performance while managing larger funds. Investment Overview Quad-C Management, Inc. is establishing Quad-C Partners X to make private equity investments in established middle-market companies in the United States. Fund X is targeting $1.5 billion in aggregate commitments. We expect Quad-C to have a first closing in June 2021. f. Thompson Street Fund VI, L.P. Manager Name: Thompson Street Capital Partners Fund Name: Thompson Street Capital Partners Fund VI, L.P. Manager Size: $2.6 billion Fund Size: $1.5 billion Recommendation: Commitment of up to $150 million PRIM made its first investment with Thompson Street Capital Partners (“Thompson Street”) in 2018. Thompson Street’s senior team has worked together for an average of 13 years. Thompson Street targets buyouts of small businesses in the Midwest and Mid-South regions of the United States in the software and technology services; healthcare and life science services and consumer and business services sectors. The majority of Thompson Street’s funds are in Cambridge Associates’ first or second quartile for fund performance.
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Executive Summary Benefits • Consistently strong performance within the lower middle-market o Portfolio companies have substantial revenue and earnings growth potential o Acquiring founder-led companies provides opportunities to drive further growth and transform companies into market leaders o Firm is skillful at making add-on acquisitions to increase growth • Highly talented organization with proven investment skill o Experienced investment team with significant experience working together o Sector expertise and firm reputation provide access to highly sought-after business Risks As with all investments, there are risks and concerns that need to be considered, including, illiquidity, exposure to an economic downturn, private equity market conditions, and firm- specific risks. Staff also reviewed the following risks and concerns associated with Fund VI: • Firm Growth: Thompson Street’s fund size has grown, which increases pressure on the organization to continue to generate outstanding investment performance while managing larger funds. • Manager Risk: If Thompson Street were to lose any of its senior investment professionals, it would likely disrupt the firm. Smaller firms are more reliant on their partners than larger investment firms. Investment Overview Thompson Street Capital Partners (“Thompson Street”) is establishing Fund VI to make private equity investments in small businesses in the Midwest and Mid-South regions of the United States. Fund VI is targeting $1.5 billion in aggregate commitments. We expect Fund VI to have a final closing in July 2021. 4. Follow-on Investment Recommendation: Flagship Pioneering Fund VII, L.P. (Voting Item) Manager Name: Flagship Pioneering Fund Name: Flagship Pioneering Fund VII, L.P. Manager Size: $10.4 billion Fund Size: $3 billion Recommendation: Commitment of up to $30 million Recommendation In March 2020, the Investment Committee and the PRIM Board approved a commitment of up to $25 million to Flagship Pioneering Fund VII, L.P. (“Fund VII” or “the Fund”). Flagship Pioneering (“Flagship”) is re-opening Fund VII to accept additional Limited Partner commitments. With this re-opening, Flagship will combine its flagship seed and early-stage fund series with its later-stage Flagship Special Opportunities (FSO) fund series, expanding Fund VII’s investment mandate to cover the full lifecycle – creation, development, and growth – of Flagship’s portfolio companies. PRIM staff and the Investment Committee recommend (unanimously) to the PRIM Board that the Board approve a commitment of up to $30 million to Flagship Pioneering Fund VII, L.P., bringing PRIM’s total commitment to $55 million.
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PRIM has invested in seven prior Flagship funds since 2004. Flagship makes venture capital investments in seed, early- and late-stage companies in therapeutics, health technology, and agricultural technology markets. The majority of Flagship’s funds are in the first or second quartile in venture capital industry peer performance rankings. Executive Summary Benefits • High-performing firm that invests in therapeutics, health technology, and agricultural technology o Returns driven by investing in companies that address areas of large, unmet demand in human health and agricultural technology o Flexible investment approach across multiple stages of development provides portfolio with upside while limiting exposure to unsuccessful projects • Flagship’s internal exploration and discovery platform, Flagship Labs, enables entrepreneurial scientists to pioneer breakthrough innovations o A majority of Flagship Pioneering’s portfolio begin as ventures that are conceived and launched by Flagship’s team • Highly talented organization with proven investment skill o Ability to attract world-class entrepreneurs and scientists Risks As with all investments, there are risks and concerns that need to be considered including, illiquidity, exposure to an economic downturn, private equity market conditions, and firm- specific risks. Staff also reviewed the following risk and concern associated with Flagship Pioneering Fund VII: • Biotech Risk: Similar to the publicly-traded companies, private companies are exposed to biotech market risks such as failures of the drug to meet development milestones and high cash burn to fund drug development costs. • Regulatory Risk: There is a risk that the FDA could become more stringent on drug approvals, specifically in the areas in which Flagship focuses. • Financing Risk: Early-stage companies need to raise additional capital. If the capital markets become unfavorable, then the risk of underperformance or even investment loss increases. Investment Overview In March 2020, the Investment Committee and the PRIM Board approved a commitment of up to $25 million to Flagship Pioneering Fund VII, L.P. Flagship raised $1.1 billion in aggregate commitments for Fund VII to make investments in seed and early-stage companies in therapeutics, health technology, and agricultural technology. In addition to its seed and early-stage fund series, Flagship launched the first fund in its Flagship Special Opportunities (FSO) fund series in 2016. The FSO funds selectively invest in later-stage Flagship portfolio companies that are more advanced in their product development and/or market entry status. In lieu of raising Flagship Special Opportunities Fund III, the successor fund in the FSO series, Flagship is re-opening Fund VII to accept additional Limited Partner commitments and to expand Fund VII’s investment mandate. Flagship Pioneering Fund VII will combine Flagship’s seed/early-stage and later-stage fund series into one investment vehicle and will invest over the full lifecycle – creation, development, and growth – of Flagship’s portfolio companies. With the aforementioned re-opening and expansion, Fund VII is targeting $3 billion
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of commitments. D. Real Estate and Timberland Performance Summary Performance data for Real Estate and Timberland is attached as Appendix I. V. Finance and Administration Report A. Draft Fiscal Year 2022 Operating Budget (Voting Item) PRIM staff and the Administration and Audit Committee recommend (unanimously) to the PRIM Board that the Board approve the Draft Fiscal Year 2022 PRIM Operating Budget attached as Appendix J. Anthony J. Falzone, Deputy Executive Director and Chief Operating Officer, and Deborah A. Coulter, CPA, Chief Financial Officer and Chief Administration Officer will present the Draft Fiscal Year 2022 PRIM Operating Budget. B. Issuance of a Request for Proposal (RFP) for Proxy Voting Services (Voting Item) PRIM staff and the Administration and Audit Committee recommend (unanimously) to the PRIM Board that the Board approve the issuance of an RFP for proxy voting services. PRIM’s contract with Institutional Shareholder Services (ISS), the incumbent provider, expires on December 31, 2021. C. Legal/Legislative Update The Board will receive an update on legal and legislative matters. D. Other Matters 1. March 2021 PRIM Operating Budget (Appendix K) Global Equity Fee Type Actual Budget Variance Percent Base Fees 51,070,844 59,559,000 8,488,156 14% Performance Fees 2,583,022 - (2,583,022) N/A Total: 53,653,866 59,559,000 5,905,134 10% Base fees variance is due to the reallocation of GSAM enhanced equity assets. Performance fees variance is due to one manager who is earning a fee and claw-back for another manager. Note, no performance fees are budgeted. Core Fixed Income Fee Type Actual Budget Variance Percent Base Fees 5,420,444 4,925,625 (494,819) -10% Performance Fees 38,209 - (38,209) N/A Total: 5,458,653 4,925,625 (533,028) -11% Base fees variance is due to higher than projected assets. Performance fee variance is due to one manager who is earning a fee. Note, no performance fees are budgeted. Value Added Fixed Income Fee Type Actual Budget Variance Percent Base Fees 31,423,911 30,945,000 (478,911) -2% Base fees variance is within expectations.
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Real Estate Fee Type Actual Budget Variance Percent Base Fees 24,706,296 27,863,625 3,157,329 11% Performance Fees 1,073,660 - (1,073,660) N/A Total: 25,779,956 27,863,625 2,083,669 7% Base fees variance is due to timing of the budgeted Core managers being funded. Performance fee variance is due to one manager who is earning a fee. Note, no performance fees are budgeted. Timberland Fee Type Actual Budget Variance Percent Base Fees 5,637,730 5,700,000 62,270 1% Performance Fees (2,500,372) - 2,500,372 N/A Total: 3,137,358 5,700,000 2,562,642 45% Base fees variance is within expectations. Performance fee variance is due to claw-back for one manager. Note, no performance fees are budgeted. Private Equity Fee Type Actual Budget Variance Percent Base Fees 104,695,881 101,325,000 (3,370,881) -3%
Base fees variance is due to higher than projected assets. Portfolio Completion Strategies Fee Type Actual Budget Variance Percent Base Fees 52,904,770 63,382,500 10,477,730 17%
Base fees variance is due to lower than projected assets. Overlay & Foreign Currency Fee Type Actual Budget Variance Percent Transaction 931,277 1,308,750 377,473 29% Variance is due to decreasing assets in liquidating and terminating portfolios. Third Party Service Providers and Operations Fee Type Actual Budget Variance Percent Operations and Contractual 25,425,780 28,644,000 3,218,220 11% Variance is due primarily to lower-than-budgeted Real Estate and Research Third-Party service provider fees and lower compensation expense due to open positions. 2. Travel Report A detailed report of expenses associated with travel (including for due diligence and fiduciary education/professional development) that have been reimbursed to employees since our prior report is attached as Appendix L. 3. Client Services Currently 99 entities, including the State Retiree Benefits Trust Fund (SRBTF – the Commonwealth’s Other Post-Employment Benefits (OPEB) liability fund), invest in the PRIT Fund. PRIM serves as an investment manager for approximately 90% of all state and local retirement systems. PRIM has 38 clients (approximately 40%) that are classified as “Participating Systems,” or systems that invest their total pension assets in the PRIT Fund. 61 clients (approximately 60%) are classified as “Purchasing Systems,” or systems that may choose to invest their total assets in the PRIT Fund or participate in the Segmentation Program. Segmentation allows systems to invest in individual asset classes, or “segments,” of the PRIT Fund as an alternative to investing in the aggregate Fund. Among the 61 Purchasing Systems, 44 invest in segments of the PRIT Fund; the remaining 17 Purchasing Systems invest their total pension assets in the PRIT Fund. Participating Retirement Systems have a mandatory five-year participation period, while Purchasing Retirement Systems do not have a minimum investment period.
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Client and Other Meetings The Client Services team continues to meet virtually with many of PRIM’s member retirement systems. The Client Services team also meets virtually with professional organizations and government entities interested in learning more about the State Retiree Benefits Trust Fund (SRBTF). The following is a list of completed and upcoming meetings since we updated the PRIM Board on February 24, 2021.
Date Name of Retirement System/Entity Meeting Location
3/10/2021 Needham Retirement Board Remote via Telephone and/or Internet 3/25/2021 Chicopee Retirement Board Remote via Telephone and/or Internet 3/25/2021 MWRA Retirement Board Remote via Telephone and/or Internet 4/29/2021 SERS Board Remote via Telephone and/or Internet 4/30/2021 Massport Retirement Board Remote via Telephone and/or Internet 5/7/2021 MBTA Retirement Fund Remote via Telephone and/or Internet 5/18/2021 Newton Retirement Board Remote via Telephone and/or Internet 5/19/2021 Middlesex County Retirement Board Remote via Telephone and/or Internet 5/25/2021 Concord Retirement Board Remote via Telephone and/or Internet 5/25/2021 Hull Retirement Board Remote via Telephone and/or Internet 5/28/2021 Lynn Retirement Board Remote via Telephone and/or Internet 6/7/2021 Franklin OPEB Board Remote via Telephone and/or Internet 6/9/2021 PRIM Investor Client Conference Remote via Telephone and/or Internet 6/3/2021 SRBTF Board Remote via Telephone and/or Internet 6/28/2021 Essex Regional Retirement Board Remote via Telephone and/or Internet 8/5/2021 SRBTF Board Remote via Telephone and/or Internet 8/25/2021 Danvers Retirement Board Remote via Telephone and/or Internet
State Retiree Benefits Trust Fund (SRBTF) Update The SRBTF met on February 4, 2021, and approved two new governmental unit submissions to invest in the SRBTF, the Town of East Bridgewater and the City of Worcester. As of March 31, 2021, the total market value of the SRBTF assets was $2.48 billion, of which approximately $771 million were “local” governmental unit assets. There are currently 77 governmental units, including MA Retirees, that invest in the SRBTF. PRIM Investor Client Conference (Remote) PRIM will be hosting the 2021 PRIM Investor Client Conference remotely on June 9, 2021 via Zoom.
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PRIT FUND PERFORMANCE
AS OF MARCH 31, 2021 GROSS OF FEES
7 Total PRIT Fund Fiscal Year Market Value Value ($Billions)
$100.0
$90.1 $90.0
$80.0 $74.8 $75.0 $71.8 $70.0 $66.9
$60.7 $61.2 $60.7 $60.0 $53.2 $50.6 $50.4 $50.2 $48.9 $50.0 $41.9 $41.3 $40.0 $36.3 $37.7
$30.0
$20.0
$10.0
$0.0 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 3/31
Source: BNY Mellon. As of March 31, 2021.
8 PRIT Fund Total Returns Annualized Returns as of March 31, 2021 (Gross of Fees)
35.0%
30.4% 30.0%
25.8% 25.0%
20.0%
15.0%
10.9% 10.2% 9.6% 10.0% 8.7% 9.0% 7.5%
4.6% 5.0%
1.4% 1.3% 1.5%
0.0% 1 Year 3 Years 5 Years 10 Years
Total Fund Return Total Core Benchmark Value Added
Source: BNY Mellon. Total Core Benchmark includes private equity benchmark.
9 PRIT Asset Class Performance Summary One‐Year Ended March 31, 2021 (Gross of Fees)
65.0% 58.9% 56.4% 55.0%
45.0% 37.8% 37.8%
35.0%
25.0% 19.9% 17.7% 16.2% 15.0% 14.3% 9.8% 7.9% 5.4% 4.6%
5.0% 2.5% 2.0% 1.5% 0.9% 0.8% 0.0%
‐5.0% 1.8% ‐ 2.6% ‐ 5.5% ‐ ‐15.0% Global Equity Private Equity* Value Added Fixed Portfolio Real Estate Timberland Core Fixed Income Income Completion Strategies**
Asset Class Benchmark Value Added
Source: BNY Mellon. Totals may not add due to rounding. *Benchmark is actual performance. **Hedge Fund returns are net of fees.
10 PRIT Performance By Strategy –First Quarter 2021 Quarter Ended March 31, 2021 (Gross of Fees)
20% 15.5% 15% 12.0%
10% 7.4% 6.5% 6.1% 4.9% 4.6% 4.5% 4.4% 5% 3.9% 3.7% 1.4% 1.4% 1.3% 0.8% 0% ‐0.1% ‐1.9% ‐5% ‐3.2% ‐3.8%
‐10%
‐15%
‐20% ‐18.7%
‐25%
Source: BNY Mellon, FactSet. All performance figures reflected are PRIT Fund Asset Class returns. *MSCI ACWI/Barclays Aggregate is derived from a 60/40 combination of index returns.
11 PRIT Performance By Strategy –One‐Year One‐Year Ended March 31, 2021 (Gross of Fees)
120%
99.7% 100%
80% 69.3% 57.0% 60% 51.5% 43.9% 37.8% 40% 32.9% 30.4% 26.1% 24.9% 20% 16.7% 14.7% 14.3% 9.8% 8.2% 7.5% 5.4% 2.6% 0.3% 0%
‐20% ‐22.4% ‐40%
Source: BNY Mellon, FactSet. All performance figures reflected are PRIT Fund Asset Class returns. *MSCI ACWI/Barclays Aggregate is derived from a 60/40 combination of index returns.
12 PRIT Fund Annualized Returns By Asset Class As of March 31, 2021 (Gross of Fees)
1 Year 3 Year 5 Year 10 Year
GLOBAL EQUITY PRIVATE EQUITY PRIVATE EQUITY PRIVATE EQUITY 58.9% 24.5% 22.6% 19.8%
PRIVATE EQUITY GLOBAL EQUITY GLOBAL EQUITY GLOBAL EQUITY 37.8% 11.9% 13.7% 9.7%
VALUE‐ADDED FIXED INCOME REAL ESTATE REAL ESTATE REAL ESTATE 17.7% 6.8% 7.1% 9.6%
PORTFOLIO COMPLETION CORE FIXED INCOME VALUE‐ADDED FIXED INCOME VALUE‐ADDED FIXED INCOME STRATEGIES 5.8% 6.7% 5.4% 14.3% PORTFOLIO COMPLETION REAL ESTATE VALUE‐ADDED FIXED INCOME CORE FIXED INCOME STRATEGIES 9.8% 5.0% 4.8% 5.0% PORTFOLIO COMPLETION TIMBER TIMBER TIMBER STRATEGIES 5.4% 4.3% 4.7% 3.6% PORTFOLIO COMPLETION CORE FIXED INCOME TIMBER CORE FIXED INCOME STRATEGIES (1.8%) 2.4% 3.8% 4.2%
Source: BNY Mellon.
13 PUBLIC MARKETS PERFORMANCE
AS OF MARCH 31, 2021 GROSS OF FEES
14 Public Market Portfolios
$57.6 billion 64.0% of PRIT Fund PRIT FUND TARGET ASSET ALLOCATION • Global Equities: $38.8 billion, 43.1% of PRIT Fund • Public Fixed Income: $18.8 billion, 20.9% of PRIT Fund* Actual Allocation as of March 31, 2021 46% Active / 54% Passive Core Fixed Income • Global Equities: 41% Active / 59% Passive Global 12%‐18% • Public Fixed Income: 55% Active / 45% Passive Equities 34%‐ 44% 50 Portfolios 15.3% Value Added • 25 equity portfolios 43.1% Fixed Income • 25 fixed income portfolios 5%‐11% 15 Asset Classes 7.2% • U.S. Large Cap Equity • U.S. Small/SMID Cap Equity • Developed International Equity • Developed International Small Cap Equity • Emerging Markets Equity • Emerging Markets Small Cap Equity • Core Bonds • 20+ Year STRIPS • Short Term Fixed Income • U.S. TIPS • Global Inflation‐Linked Bonds • High Yield Bonds • Bank Loans • EMD $ • Other Credit Opportunities
15 Source: BNY Mellon and PRIM Staff. As of March 31, 2021. *Excludes Private Debt allocation. Public Equity Review MAJOR COUNTRY RETURNS (MSCI ACWI) GLOBAL ONE‐YEAR RETURN BY SECTOR (MSCI ACWI)
70% 90% 59% 78% 77% 60% 80% 72% 70% 50% 62% 44% 57% 57% 60% 40% 50% 40% 34% 50% 40% 30% 30% 30% 30% 25% 23% 20% 16% 16% 13% 20% 10% 10% 7% 7% 10% 4% 3% 0% 0% United States China Japan United Kingdom 1‐Year 5‐Years 10‐Years
VALUE VS. GROWTH: RELATIVE RETURNS VS. RUSSELL 3000 (CUMULATIVE)
25% 20% 15% 10% 5% Growth: +11.4% 0%
‐5% Value: ‐13.4% ‐10% ‐15% ‐20% ‐25% 1/2020 2/2020 3/2020 4/2020 5/2020 6/2020 7/2020 8/2020 9/2020 10/2020 11/2020 12/2020 1/2021 2/2021 3/2021
Russell 3000 Growth Russell 3000 Value
16 Source: FactSet, PRIM Staff. All data as of March 31, 2021 or most recent report. Global Equity $38.8 Billion – 43.1% of PRIT FUND (Target 34%‐44%)
ASSET ALLOCATION GROSS OF FEES PERFORMANCE 41% ACTIVE/59% PASSIVE 120.0% 99.7%
100.0% 96.5%
80.0% 69.3% 61.1% 57.0% Developed 60.0% 56.5%
International 51.5%
U.S. Large Cap $12.8B; 33% 47.2% $16.9B; 43% 43.9% 39.4% 40.0%
20.0%
Emerging Markets 8.2% 4.5% 4.4%
$4.7B; 12% 3.2% 0.5% 0.0% U.S Small/SMID U.S. Small/SMID Emerging Markets U.S. Large Cap Developed Int'l Domestic Enhanced $3.5B; 9% Cap
Domestic Enhanced $1.0B; 3% Asset Class Benchmark Value Added
Source: BNY Mellon, PRIM Staff. As of March 31, 2021.
17 Public Fixed Income Review U.S. TREASURY YIELD CURVE TARGET FED FUNDS RATE
3% 6% Current Target: 0‐25bps
3% 5%
2% 4%
2% 3% 1% 2% 1% 1% 0% 3 mo 2 Yr 5 Yr 10 Yr 30 Yr 0% 3/31/2021 Prior Quarter End 1 Year Ago 2006 2009 2012 2015 2018 2021
U.S. CREDIT SPREADS EMERGING MARKETS DEBT SPREAD
2000 800 Current: 319bps Investment Grade: 86bps 1800 High Yield: 336bps 700 1600 1400 600
1200 500 1000 800 400
600 300 400 200 200 0 100 2006 2009 2012 2015 2018 2021 0 IG Spread HY Spread 2006 2009 2012 2015 2018 2021
18 Source: FactSet, PRIM Staff. All data as of March 31, 2021 or most recent report. Core & Value‐Added Fixed Income $18.8 Billion – 20.9% of PRIT Fund* (Target 17%‐29%)
ASSET ALLOCATION GROSS OF FEES PERFORMANCE 30.0% 26.1% 55% ACTIVE/45% PASSIVE 24.9% 23.2% 20.7% 20.0% 16.7% 14.7% 14.3% 12.9% 10.6% 10.0% 7.5% 7.3%
TIPS/ILBs 2.9% 2.6% 1.9% 1.8%
$3.7B; 20% 0.7% 0.3% 0.3% Core FI (Agg) 0.2% $5.7B; 30% 0.0% 0.1% 0.1% ‐ ‐ 4.0% ‐ 20+ Year STRIPS ‐10.0% $2.5B; 13%
OCO $0.8B; 4% ‐20.0% EMD $ $0.9B; 5% High Bank Loans $2.0B; 10% 22.2% 22.4% ‐
Yield ‐ $1.4B; 7% Short Term FI ‐30.0% $1.9B; 10% High Yield EMD $Bank Loans OCO TIPS/ILBs Core FI (Agg) Short Term 20+ Yr FI STRIPS
Asset Class Benchmark Value Added
Source: BNY Mellon, PRIM Staff. As of March 31, 2021. *Excludes Private Debt allocation.
19 POWER PACIFIC CHINA A-SHARES Presentation to PRIM Board May 26, 2021
Portfolio Completion Strategies
Deborah B. Goldberg, Treasurer and Receiver General, Chair Michael G. Trotsky, CFA, Executive Director and Chief Investment Officer
1 China’s Economy and Equity Market Keep Growing
2 China A-Shares: An Expansive Universe ❑ China A-Shares are the stock shares of mainland China-based companies that trade on the two Chinese stock exchanges, the Shanghai Stock Exchange and the Shenzhen Stock Exchange. ▪ 3,760 companies are traded as A-Shares, totaling $11.7 trillion market capitalization.
Source: HKEx, Top Foreign Stocks, July 2020
❑ Despite significant market value, China companies are underrepresented in global investors’ portfolios. ▪ 1.8% of PRIT Fund in China equities, among which only 0.3% in China A-Shares.
3 China A-Shares have Low Correlation to Other Global Markets
❑ Diversification benefit of Emerging Markets (EM) investing has diminished, as EM in general has become more correlated with Developed Markets over the years. ❑ Remarkably, China A-Shares still exhibit low correlation to other markets, providing potential diversification benefit to oversea investors.
Market Correlation (Last 10 years as of December 2020)
4 Alpha Opportunity in an Inefficient Market
❑ Retail-driven market: 80% of China A-Shares’ trading volume is from momentum, retail investors whose investment horizon tends to be short.
❑ Smaller analyst coverage: 70% of China A-Shares companies of notable size are covered < 3 analysts. ▪ This compares to only 14% of US stocks of notable size are covered <3 analysts.
Inefficient market means attractive opportunities for active investors: fundamental stock pickers with long-time horizon are more likely to uncover underappreciated investment opportunities.
Source: Wind, SSE Annual Year book, UBS Securities estimates Source: Reuters Eikon; UBS HFS, as of August 2020.
5 Increased Market Access and Liquidity for Overseas Investors ❑ Opening underway ➢ QFII: Qualified Foreign Institutional Investor ▪ First launched in 2002, the program allows licensed international investors to participate in mainland China stock exchanges. ➢ “Stock Connect”: Shanghai-Hong Kong, Shenzhen-Hong Kong, Shanghai-London ▪ First launched in 2014, the programs allow international investors to invest in the China mainland stock market through mutual access arrangements between stock exchanges. ➢ In April 2020, China lifted foreign ownership limits on securities and asset management firms.
❑ Accordingly, MSCI is including increasing amount of China A-Shares in its indices, facilitating ever more ownership from and better liquidity for overseas investors. China A-Shares Inclusion in MSCI EM
6 Proposed Partner to Explore Opportunities in China A-Shares
Investment Information Parent Firm Power Corporation of Canada Manager Name Power Pacific Investment Management Strategy Inception 2005 Office Locations Shanghai, China; Montreal, Canada Strategy China A-Shares Absolute Return; in-depth research; directional fund Strategy AUM $850 million Diverse? Female CIO; half of investment team members are female Proposed Investment Size Initial Investment up to $200 million Vehicle Separately Managed Account
7 Experienced Local Team with Interests Well-Aligned
• Well-sized bilingual investment team based in Shanghai. • Thorough due diligence; concentrated portfolio. • Large portion of the team’s bonus locked up in the fund; CIO has significant investment in the fund. • Stable capital base, with vast majority of AUM from Power Corporation of Canada.
Source: Power Pacific 8 Performance Summary ❑ Power Pacific outperformed MSCI China A Index on both absolute and risk adjusted basis, and also outperformed in drawdowns.
last 3 Years (as of 12/2020) Return MOIC Volatility Sharpe Ratio Beta Max DD Power Pacific 23.5% 1.88 X 22.5% 1.1 0.9 25% MSCI China A Index 8.9% 1.29 X 22.9% 0.4 1.0 38%
last 8 Years Return MOIC Volatility Sharpe Ratio Beta Max DD Power Pacific 18.6% 3.91 X 16.6% 1.1 0.5 25% MSCI China A Index 8.9% 1.98 X 24.8% 0.4 1.0 52% * since 2013 when the current CIO started overseeing equity research
Current CIO completely took over in 2016
9 Year Year Top Risk-Adjusted Performer in Peer Universe
❑ 68 China A-Shares fund products are reporting to the eVestment database ▪ 44 funds have track record longer than five years.
❑ Among peers, Power Pacific’s absolute return was noticeably above the median, with the lowest volatility, resulting in a top ranking in terms of risk-adjusted performance.
Peer Boxplot - 5Y Return and Volatility Peer Boxplot - 5Y Sharpe Ratio
max
Upper Quartile
Median
Lower Quartile min
10 Source: eVestment, Power Pacific Comparison vs. General EM Manager Power Pacific could be complementary to current lineup of EM managers (Baillie Gifford as an example)
• Power Pacific focuses on China A-Shares, stocks listed on onshore exchanges. • Baillie Gifford’s China sleeve mostly invests in US-listed stocks and H Shares (Hong Kong-listed).
• Power Pacific focuses more on Consumers, Healthcare, Information Technology, and Industrials. • Baillie Gifford’s China sleeve is heavily weighted towards Information Technology.
Source: Factset, Power Pacific
11 Summary
❑ China A-Shares present attractive opportunities for investors. ▪ Growing economy ▪ Equity market with sufficient depth and breadth ▪ Market inefficiency offers fertile ground for long-term stock pickers ▪ Increased market access and liquidity for international investors
❑ Power Pacific: a trustworthy partner for exploring alpha opportunities in the China A-Shares universe. ▪ Top-notch, diverse investment team ▪ Well-aligned interest ▪ Excellent track record ▪ Complementary to PRIT’s Emerging Markets exposure
12 APPENDIX
13 China Key Economic Indicators
GDP Growth Rate Back to Pre-Covid Level History of Moderate Inflations
Source: Wind Source: CEIC and Citi Research RMB faces appreciation pressures PMI decreased in early 2021 but still above 50
14 Source: Citi Research, Bloomberg Source: Wind China’s Economic Reforms Contribution to GDP Growth
• Domestic demand is playing an increasingly important role boosting China’s economy, as China’s household wealth and productivity progresses.
Source: Wind R&D Expense as % of GDP • China’s R&D investment to GDP ratio has been rising for past years although it is still low comparing to developed countries.
15 Source: World Bank Comparison - Sector Breakdown • Financials is among the largest sectors in both China onshore and offshore markets.
• Before, the traditional sector firms tended to list onshore (e.g., China Merchants Bank, Kweichow Moutai Liquor), while growth names were likely to go offshore (e.g., Tencent, Mengniu Dairy). Recent years, the distinction is blurred.
• A greater number of US-listed companies, especially Tech firms, relisted/dual-listed in Hong Kong and/China Mainland Stock Exchanges, to benefit from diversified capital access.
16 Source: CSI, Hang Seng Indexes, iShares Capital Flows through Stock Connect
• There are consistently net capital inflows to China A-Shares through stock connects.
• Capital inflows are expected to continue outweighing outflows due to financial market opening and large interest rate differential between China and developed markets.
RMB, billion
Source: Wind 17 BENCHMARK RECOMMENDATIONS PRESENTED BY Jay Leu, Director of Risk Matt Liposky, Chief Investment Operating Officer
May 26, 2021
Deborah B. Goldberg, Treasurer and Receiver General, Chair Michael G. Trotsky, CFA, Executive Director and Chief Investment Officer
1 INTERNATIONAL AND EMERGING MARKETS EQUITY
2 Proposed Benchmark Actions - Rationale
Manager Benchmarks • Improve Risk Management – Split the Developed International SSGA passive mandate into a large piece and a small piece will facilitate better risk management. • Simplify Benchmarks – Utilize a single benchmark for Developed International managers - Moving the passive and active Developed International managers to a single benchmark will simplify the benchmark.
Asset Class Benchmarks • Simplify Benchmarks – Utilize a single benchmark for non-US Global Equities (1) enables the natural use of ACWI ex-US combining developed international and emerging markets (2) includes Canada. • Best Practice – Utilize a “cap-weighted” benchmark vs. a “fixed weight” benchmark is best practice.
• Fixed-weight sub-asset class benchmarks have the drawback of extra trading costs to rebalance back to fixed weight when weights drift due to relative market moves.
• Cap-weighted asset class benchmarks adjust to relative market moves of sub-asset classes.
• For example, a cap-weighted benchmark starts out at 90% large 10% small. Strong relative performance of small caps might bring the cap weights to 88%-12%. A fixed-weight benchmark of 90-10 might cause rebalancing back from 88-12 back to 90-10. At a minimum, relative market moves produce extra active risk relative to a fixed weight benchmark .
3 Proposed Benchmark Actions
Manager Benchmarks • Split SSGA Passive World Ex-US IMI account into (a) SSGA Passive World Ex-US Small account and (b) SSGA Passive World Ex-US Standard (Large) account and create two new associated benchmarks • Change manager benchmark for active Developed International Large Cap managers (Marathon, Baillie Gifford, Mondrian, Xponance) from MSCI Custom EAFE Standard to Custom World Ex-US Standard (note: adds Canada) • Change manager benchmark for active Developed International Small Cap managers (TimesSquare, Acadian, AQR) from MSCI Custom EAFE Small to Custom World Ex-US Small Cap (note: adds Canada)
Asset Class Benchmarks • Change asset class benchmark for International Equity from fixed weight (40% World Ex-US IMI, 55% EAFE Standard, 5% EAFE Small) to MSCI World Ex-US IMI • Change asset class benchmark for Emerging Markets Equity from fixed weight (90% EM Standard (Large) Net Div ,10% EM Small Net Div) to MSCI Emerging Markets IMI • Change asset class benchmark for Global Equity from fixed weight (53.85% Domestic Equity BM, 33.33% International Equity, 12.82% Emerging Markets BM) to fixed weight (56.9% Domestic Equity BM, 43.1% ACWI Ex-US IMI) Custom Benchmarks: all of the current benchmarks and proposed benchmarks are (1) custom (no Iran, Sudan, tobacco) and (2) net dividends version Effective July 1, 2021 for all of these changes
4 PRIVATE EQUITY
5 Allocation vs. Manager Selection Illustration
Implementation decision 16 – did PRIM private equity beat the peer universe? 14 Did PRIM pick better funds/managers? 12
10 Allocation decision – did private equity beat 8 public markets?
6
4
2
0 Russell 3000 Private Equity Peer PRIM Private Equity PRIM Private Equity Universe (stacked) Russell 3000 Private Equity Peer Universe PRIM Private Equity
6 Private Equity - Proposed Benchmark Actions
• Continue to use the current private equity benchmark (Russell 3000* +3%) and add an additional benchmark (peer universe) • The benchmarks measure different decisions – current benchmark measures strategic (asset allocation) and the peer benchmark measures implementation (manager selection) • Current benchmark (Russell 3000* + 3%) serves as a strategic benchmark measuring allocation decision • Answers the question “is the PRIM private equity exposure the best expression of equity exposure ?” • How do PRIM Private Equity portfolio returns compare to public markets? • Current benchmark is effective over intermediate and long time periods • Reporting time period mismatch – our current benchmark compares the Private Equity 1-year actual performance to a long-term, smoothed 7-year average public markets benchmark (Russell 3000 + 3%), can result in dramatic differences, especially during volatile markets and when looking at short term performance. • Peer universe benchmark will serve as an implementation benchmark measuring manager selection • Answers the question “has PRIM picked managers and funds that are better than average?” • Does not suffer from short-term volatility swings because both the peer universe benchmark and PRIM private equity portfolio use private equity valuations and not more volatile public equity valuations; no time period mismatch • Incorporate State Street Private Equity Ex-Private Debt peer universe benchmark as a secondary benchmark • Adopt the State Street Private Equity ex-Private Debt peer universe as the new Interim benchmark, effective July 1, 2021 • Rename the Interim benchmark as the Implementation benchmark
* Technically, 85.9% Russell 3000 + 14.1% MSCI Europe IMI Comparison of Peer Universe Providers Why State Street? • State Street • State Street data collected from similar custodian clients • Similar size funds, geographic distribution, strategy distribution to those of PRIT • Includes many large public funds including CalPERS, CalSTRS • Burgiss • Burgiss returns are not “frozen” (i.e. they change for several months as results are reported) • Burgiss returns are not available immediately after quarter end • Burgiss universe is dominated by smaller funds (21% of benchmark in funds less than $100 million) • Cambridge • Cambridge client base is skewed toward endowments and foundations (smaller AUM) • Higher allocation to venture capital
Region PRIT State Burgiss Cambridge Strategy PRIT State Street Burgiss Cambridge Street US 73% 69% 63% 64% Buyouts 72% 72% 68% 68% Venture 16% 14% 16% 17% Europe 22% 18% 14% 20% Growth Equity 12% 11% 2% 15%
ROW 5% 13% 9% 16% Other 14% APPENDIX
9 MSCI Global Equity Index hierarchy
ACWI Ex-US Domestic (US) IMI IMI
Index Weight 43.54% 56.46%
EM World Ex-US Domestic (US) IMI IMI IMI
Index Weight 13.37% 30.17% 56.46%
EM EM World EX-US World Ex-US Domestic (US) Domestic Standard /Large Small Cap Standard / Large Small Cap Large Cap SMID / Small Cap
Index 11.98% 1.39% 25.65% 4.53% 42.85% 13.61%
Source: MSCI Note: weights are % of global equity 10 January 31, 2021 PENSION RESERVES INVESTMENT MANAGEMENT BOARD
DRAFT FISCAL YEAR 2022 OPERATING BUDGET
BUDGET DISCUSSION
The Pension Reserves Investment Management (PRIM) Board's fiscal year (FY) 2022 Operating Budget reflects the investment management, advisory, and operational costs necessary to implement, measure, and monitor the approximated $90 billion in investments of the Pension Reserves Investment Trust (PRIT) Fund.
Budget Highlights The projected FY 2022 budget of $474 million is 52.7 basis points (bps) of projected average PRIT Fund assets ($90 billion), a $42.5 million, or 9.8%, budget increase from the prior year. As is our custom, budgeted expenses for FY 2022 are conservative and foresee continued asset growth. Actual expenses incurred may vary because most expenses are a function of asset levels and investment performance is not predictable.
Investment Management Fees and Third-Party Service Providers comprise $453.3 million, or 95.6%, of the projected total budget. Investment Management Fees increased by $37.5 million, or 9.5%, due primarily to a projected growth in assets. Projected costs for Third-Party Service Providers increase by $3.2 million, or 16.7%, mainly due to support of new initiatives and asset growth within Managed Account Platforms.
Operations comprise $20.7 million, or 4.4%, of the total budget. Operations increases by $1.8 million, or 9.3%, due primarily to a projected increase in staff size.
2
The PRIT Fund’s current target asset allocation ranges, approved in February 2021, are as follows:
Asset Class Range Global Equity 34 - 44% Core Fixed Income 12 - 18% Value Added Fixed Income 5 - 11% Private Equity 11 - 17% Real Estate 7 - 13% Timberland 1 - 7% Portfolio Completion Strategies 7 - 13%
Based on these target asset allocation ranges, PRIM’s Fiscal Year 2022 Operating Budget allocation is projected to be as follows:
FISCAL YEAR 2022 OPERATING BUDGET ALLOCATION Portfolio Completion Global Equities Value Added Strategies 15% 18% Fixed Income 10%
Real Estate 8%
Operations 4%
Third Party Service Providers 5%
Private Equity Timberland 35% 2% Overlay, Foreign Core Fixed Income Currency, and Other 2% 1%
3
PENSION RESERVES INVESTMENT MANAGEMENT BOARD Fiscal Year 2022 Budget Summary FY22 FY21 (bps)# (bps)# FY 2022 FY 2021 Investment Management Fees ^ Global Equities 18.8 24.6 73,810,000 79,412,000 Core Fixed Income 5.5 5.3 7,770,000 6,567,500 Value Added Fixed Income 73.9 71.0 48,140,000 41,260,000 Real Estate 51.5 49.9 38,865,000 37,151,500 Timberland 27.4 26.9 7,900,000 7,600,000 Private Equity 149.6 150.1 165,825,000 135,100,000 Portfolio Completion Strategies (PCS) 107.6 105.7 87,532,000 84,510,000 Overlay, Foreign Currency, and Other 18.9 21.8 985,000 1,745,000 47.9 50.1 430,827,000 393,346,000
Third-Party Service Providers Custodian 0.1 0.2 935,000 1,690,000 General 0.2 0.2 2,050,000 1,630,000 Real Estate & Timberlands 2.3 2.5 2,450,000 2,550,000 Public Markets 0.3 0.2 1,650,000 1,100,000 Private Equity 1.7 2.1 1,900,000 1,900,000 Portfolio Completion Strategies 10.9 8.9 8,830,000 7,080,000 Research 0.2 0.1 1,800,000 650,000 Audit & Tax 0.1 0.1 472,000 447,000 Legal 0.1 0.1 475,000 475,000 Governance 0.0 0.0 315,000 265,000 Risk Measurement and Investment Analytics 0.2 0.2 1,625,000 1,500,000 2.5 2.5 22,502,000 19,287,000 Operations Compensation & Employee Benefits 1.9 2.0 17,219,000 15,554,000 Occupancy 0.1 0.2 1,300,000 1,250,000 Insurance 0.1 0.1 495,000 440,000 General Office Expenses 0.0 0.0 330,000 365,000 Computer & MIS Expenses 0.1 0.1 945,000 765,000 Travel, Prof. Develop, Dues & Subscriptions 0.0 0.1 335,000 457,000 Client Service 0.0 0.0 47,000 74,000 2.3 2.4 20,671,000 18,905,000
Total Operating Budget 52.7 55.0 474,000,000 431,538,000
# Basis points (bps) for Investment Management Fees are calculated by dividing the budgeted fees by the estimated assets under management (AUM) for each asset class. Basis points for Third-Party Service Providers for Real Estate & Timberlands, Public Markets, Private Equity, and PCS are also calculated based upon each asset classes estimated AUM. For all other expenses, the bps are calculated based upon the total PRIT Fund AUM, which is estimated to be $90 billion and $78.5 billion for FY22 and FY21 respectively. ^ No investment performance, incentive, or carried interest fees are budgeted.
4
Pension Reserves Investment Management Board Fiscal Year 2022 Operating Budget
Global Equities
Domestic Equity FY 2022 FY 2021 SSgA (S&P 500 Index) 1,500,000 810,000 SSgA (Russell 2500 Index) 130,000 155,000 Frontier 2,220,000 2,800,000 Riverbridge 3,180,000 1,700,000 Summit Creek 4,760,000 3,200,000 GSAM – Domestic Enhanced Equity 4,230,000 17,000,000 Acadian 370,000 210,000 Brandywine 1,500,000 850,000 Lord Abbett 1,910,000 870,000 Driehaus 1,700,000 870,000
21,500,000 28,465,000 International Equity SSgA (World Ex-US Index) 220,000 402,000 SSgA (Small Cap) 220,000 - Marathon 8,360,000 8,300,000 Baillie Gifford 7,720,000 5,900,000 Mondrian Investment 3,600,000 3,300,000 Xponance 1,910,000 880,000 Acadian 1,590,000 1,750,000 AQR 1,270,000 1,050,000 LMCG - 350,000 Strategic Global - 760,000 TimesSquare 1,270,000 1,450,000 26,160,000 24,142,000 Emerging Markets Equity Acadian 3,280,000 2,535,000 Wasatch 2,440,000 1,500,000 Acadian (Frontier) - 1,950,000 Baillie Gifford 6,140,000 4,900,000 City of London** - 1,060,000 Driehaus 4,340,000 3,400,000 Harding Loevner - 3,010,000 Pzena 6,030,000 5,230,000 AQR (Performance Fees Only)^ - - T. Rowe Price 3,920,000 3,220,000 26,150,000 26,805,000
Total Global Equities 73,810,000 79,412,000 ** This portfolio invests in closed-end and commingled funds. Budgeted fees exclude the costs of underlying closed-end and commingled funds, which charge average fees ranging from 1% to 2% of net assets under management. ^ No investment performance, incentive, or carried interest fees are budgeted.
5
Pension Reserves Investment Management Board Fiscal Year 2022 Operating Budget
Core Fixed Income FY 2022 FY 2021 Blackrock (BA Index) 120,000 170,000 Blackrock (TIPS Index) 260,000 240,000 Blackrock (ILB) 1,200,000 1,135,000 Blackrock (STRIPS Index) 260,000 272,000 Blackrock Short Term FI 170,000 125,000 PIMCO 1,600,000 1,323,000 Loomis Sayles 2,000,000 1,800,000 Community Capital 135,000 130,000 AFL-CIO* 175,000 180,000 Access Capital 360,000 340,000 Longfellow 540,000 275,000 New Century 350,000 275,000 Pugh 600,000 302,500 Total Core Fixed Income 7,770,000 6,567,500
Value-Added Fixed Income Fidelity 1,590,000 1,340,000 Loomis Sayles 2,220,000 1,900,000 Shenkman 1,700,000 1,430,000 Eaton Vance* 3,920,000 3,700,000 Voya* 3,180,000 3,020,000 PIMCO 1,590,000 1,370,000 Ashmore* 3,280,000 3,300,000 Private Debt – Various Managers* 20,090,000 18,700,000 Other Credit Strategies – Various Managers* 10,570,000 6,500,000 Total Value-Added Fixed Income 48,140,000 41,260,000
* Investments are in investment structures (commingled funds, partnerships, etc.) where management fees are not directly paid to the investment managers by PRIM, but rather fees are indirectly paid via a reduction of PRIM's investment.
6
Pension Reserves Investment Management Board Fiscal Year 2022 Operating Budget
Real Estate
REITs FY 2022 FY 2021
CenterSquare 3,000,000 3,044,000 Brookfield 2,700,000 3,150,000 5,700,000 6,194,000
Core Strategy
AEW* 7,000,000 7,000,000 INVESCO* 9,750,000 9,500,000 LaSalle* 6,400,000 6,300,000 CBRE Global Investors* 1,500,000 1,600,000 Stockbridge Advisors* 1,500,000 1,800,000 DivcoWest Core* 1,000,000 1,000,000 27,150,000 27,200,000
Non - Core Strategy
Various Managers* 6,015,000 3,750,000 New Boston Fund* - 7,500 6,015,000 3,757,500
Total Real Estate 38,865,000 37,151,500
*Investments are in investment structures (commingled funds, partnerships, etc.) where management fees are not directly paid to the investment managers by PRIM, but rather fees are indirectly paid via a reduction of PRIM's investment.
7
Pension Reserves Investment Management Board Fiscal Year 2022 Operating Budget
Timberland
FY 2022 FY 2021 Forest Investment Associates* 2,900,000 2,800,000 Campbell Group* 5,000,000 4,800,000 Total Timberland 7,900,000 7,600,000
Private Equity
Various Managers* 165,825,000 135,100,000 Total Private Equity 165,825,000 135,100,000
* Investments are in investment structures (commingled funds, partnerships, etc.) where management fees are not directly paid to the investment managers by PRIM, but rather fees are indirectly paid via a reduction of PRIM's investment.
8
Pension Reserves Investment Management Board Fiscal Year 2022 Operating Budget
Portfolio Completion Strategies (PCS)
FY 2022 FY 2021 Replication Strategies 162,000 180,000 PAAMCO – Hedge Fund-of-Funds*< 5,850,000 4,730,000 Direct Hedge Funds* 64,230,000 60,500,000 Emerging Manager Program 5,290,000 2,600,000 Real Assets* 12,000,000 16,500,000 Total PCS 87,532,000 84,510,000
Overlay, Foreign Currency and Other
Parametric (Overlay) 370,000 435,000 Russell (Foreign Currency) 575,000 410,000 Private Natural Resources Wind-Down* 40,000 900,000 Total Overlay, Foreign Currency and Other 985,000 1,745,000
* Investments are in investment structures (commingled funds, partnerships, etc.) where management fees are not directly paid to the investment managers by PRIM, but rather fees are indirectly paid via a reduction of PRIM's investment. < Excludes costs of underlying hedge funds, which charge average fees ranging from 1% to 2% of net assets under management, plus performance fees of up to 20% of excess returns. These costs are embedded in net hedge fund performance and grow in proportion to the assets under management.
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Pension Reserves Investment Management Board Fiscal Year 2022 Operating Budget
Third-Party Service Providers
Custody FY 2022 FY 2021 Master Custody Services* 935,000 1,500,000 OTC Valuation* - 130,000 GASB Reporting and Other* - 60,000 935,000 1,690,000
General Asset Allocation 230,000 225,000 Benchmarking Advisory Services 115,000 - Operational Due Diligence 415,000 415,000 Information Technology 400,000 360,000 Legislative Restrictions & Benchmarking 175,000 175,000 Communications 125,000 125,000 Compensation and Human Resources 140,000 130,000 Other 100,000 100,000 Compliance 100,000 100,000 Investment Equity Diversity Program 250,000 - 2,050,000 1,630,000
Real Estate and Timberlands Real Estate and Timberlands Advisors 1,000,000 1,100,000 Debt Compliance and Reporting 350,000 350,000 Direct Investment Advisory & Other Advisory Projects 1,100,000 1,100,000 2,450,000 2,550,000
Public Markets Public Markets Advisor 350,000 350,000 Managed Account Platform Providers-OCO^ 1,000,000 450,000 Public Markets - Other 300,000 300,000 1,650,000 1,100,000
Private Equity Private Equity Advisor 1,500,000 1,500,000 Private Equity - Other 400,000 400,000 1,900,000 1,900,000
* A new Master Custody Services contract will start on 7/1/2021. Under this new agreement OTC Valuation, GASB reporting and other expenses will be included in the annual flat fee. ^ For FY22 Managed Account Platforms Providers expenses are broken out from Public Markets Advisor fees. For comparison purposes FY 21 Managed Account Platforms Providers expenses have been broken out of Public Markets Advisor fees.
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Pension Reserves Investment Management Board Fiscal Year 2022 Operating Budget
Third-Party Service Providers (continued)
Portfolio Completion Strategies FY 2022 FY 2021 Portfolio Completion Strategies Advisor 1,375,000 1,000,000 Managed Account Platform Provider 7,075,000 5,700,000 PCS - Other 380,000 380,000 8,830,000 7,080,000
Research Research Tools 1,800,000 650,000 1,800,000 650,000
Audit and Tax Annual Financial Statement Audits^ 285,000 285,000 Agreed-Upon Procedures 62,000 62,000 Tax Services & Other 125,000 100,000 472,000 447,000
Legal Outside Counsel 475,000 475,000 475,000 475,000
Governance Proxy Voting Services 210,000 200,000 Council of Institutional Investors 35,000 35,000 Board Education 20,000 20,000 Advisory Services and Other 50,000 10,000 315,000 265,000
Risk Measurement and Analytics Risk Measurement Systems 850,000 850,000 Investment Tools and Analytics 775,000 650,000 1,625,000 1,500,000
Total Third-Party Service Providers 22,502,000 19,287,000
^ Additional audit fees are incurred and are charged directly to the investments.
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Pension Reserves Investment Management Board Fiscal Year 2022 Operating Budget
Operations
Compensation & Employee Benefits FY 2022 FY 2021 Full-Time Staff (including vacant positions) 16,800,000 15,200,000 Dental and Vision 9,000 9,000 Disability 70,000 70,000 Medicare Tax 250,000 210,000 Miscellaneous 90,000 65,000 17,219,000 15,554,000
Occupancy Lease 1,220,000 1,170,000 Utilities 60,000 60,000 Leasehold Improvements and Other 20,000 20,000 1,300,000 1,250,000
Insurance Fiduciary 335,000 285,000 Business Insurance Policies 40,000 35,000 Workers Compensation 20,000 20,000 Errors & Omissions 100,000 100,000 495,000 440,000
General Office Expenses Printing, Postage, and Courier 65,000 95,000 Payroll / Employee Timesheets / HRIS 65,000 65,000 Meeting Expenses and Stenographer 20,000 30,000 Records Storage 30,000 25,000 Office Supplies, Equipment, and Other 100,000 100,000 Temporary Labor 50,000 50,000 330,000 365,000
Computer & MIS Expenses Hardware & Software 510,000 425,000 Support and Development 310,000 235,000 MIS Other / ISP & Remote Access 125,000 105,000 945,000 765,000
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Pension Reserves Investment Management Board Fiscal Year 2022 Operating Budget
Operations (continued)
Travel, Prof. Development & Dues and Subscriptions FY 2022 FY 2021 Due Diligence Travel 150,000 215,000 Professional Development 75,000 132,000 Professional Dues and Subscriptions 110,000 110,000 335,000 457,000
Client Service Meetings and Conferences 15,000 30,000 Auto Mileage & Parking 12,000 24,000 Printing 20,000 20,000 47,000 74,000
Total Operations 20,671,000 18,905,000
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Pension Reserves Investment Management Board Fiscal Year 2022 Operating Budget
OPERATING BUDGET NARRATIVE
The Fiscal Year (FY) 2022 Operating Budget is presented in three broad expense categories: • Investment Management Fees • Third-Party Service Providers • Operations
Investment Management Fees: PRIM employs professional investment managers and gives them discretion, consistent with specified objectives and guidelines, to manage the PRIT Fund’s assets. Investment management fees are the fees paid to these investment managers for their services. Each investment manager operates under a contract (generally an investment management agreement or a partnership agreement) that delineates its responsibilities and appropriate performance expectations. Budget projections for investment management fees are based on the following factors and year-to-year budget fluctuations reflect changes to one or more of these factors:
• The PRIT Fund asset allocation • Assets under management (AUM) • Contractual fee schedules • Capital commitments
No performance fees, incentive fees, or carried interest are included in this budget due to the difficulty in estimating these fees in advance.
Third Party Service Providers: PRIM employs third-party service providers to support the PRIM Board, committees and staff to manage the PRIT Fund. Budget projections for third-party service providers are generally estimated based upon current service contracts and estimated future potential services.
Operations: Operations expenses are projected based on current expenses and strategic initiatives that are deemed to be both probable and estimable.
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Pension Reserves Investment Management Board Fiscal Year 2022 Operating Budget
Investment Management Fees
Global Equities Global Equities is comprised of Domestic Equity, International Equity and Emerging Markets Equity.
Domestic Equity The total Domestic Equity fee budget of $21.5 million, decreases $7.0 million, or (24.5)%, in FY 2022 due primarily to a decrease in assets in the Domestic Enhanced Equity strategy.
Active/ Manager Mandate Passive Fee Type SSgA Custom S&P 500 Index Passive Net Asset Value (NAV) SSgA Custom Russell 2500 Index Passive NAV Frontier Custom Russell 2000 Value Active NAV Riverbridge Custom Russell 2500 Growth Active NAV Summit Creek Custom Russell 2000 Growth Active NAV GSAM CustomHedgedS&P500Index Active NAV Acadian Custom Russell Microcap Active NAV and Performance Brandywine Custom Russell Microcap Active NAV Lord Abbett Custom Russell Microcap Active NAV Driehaus Custom Russell Microcap Active NAV
International Equity The total International Equity fee budget of $26.2 million, increases by $2.1 million, or 8.4%, in FY 2022. This is mainly due to a projected increase in NAV.
Active/ Manager Mandate Passive Fee Type SSgA Custom World-Ex US Index Passive NAV SSgA Custom Small Cap Passive NAV Marathon Custom MSCI EAFE Active NAV Baillie Gifford Custom MSCI EAFE Active NAV Mondrian Custom MSCI EAFE Active NAV Xponance Custom MSCI EAFE Active NAV Acadian Custom MSCI EAFE – SC Active NAV AQR Custom MSCI EAFE – SC Active NAV TimesSquare Custom MSCI EAFE – SC Active NAV
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Pension Reserves Investment Management Board Fiscal Year 2022 Operating Budget
Emerging Markets Equity The total Emerging Markets Equity fee budget of $26.2 million, decreases $.7 million, or (2.4) %, in FY 2022. This is mainly due to terminating multiple Emerging Managers.
Active/ Manager Mandate Passive Fee Type Acadian EM Small Cap Active NAV Wasatch EM Small Cap Active NAV Baillie Gifford Emerging Markets Active NAV Driehaus Emerging Markets Active NAV Pzena Emerging Markets Active NAV AQR Emerging Markets Active Performance T. Rowe Price Emerging Markets Active NAV
Core Fixed Income
The total Core Fixed Income fee budget of $7.8 million, increases $1.2 million, or 18.3%, in FY 2022. This is mainly due to a projected increase in NAV.
Active/ Manager Mandate Passive Fee Type BlackRock BA Index Passive NAV BlackRock TIPS Index Passive NAV BlackRock ILB Active NAV BlackRock STRIPS Index Passive NAV BlackRock Short Term FI Passive NAV PIMCO Core FI Active Funded and Performance Loomis Sayles Core FI Active NAV Community Capital Core FI - ETI Active NAV AFL-CIO Core FI - ETI Active Commingled Fund – NAV Access Capital Core FI – ETI Active NAV Longfellow Core FI Active NAV New Century Core FI Active NAV Pugh Core FI Active NAV
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Pension Reserves Investment Management Board Fiscal Year 2022 Operating Budget
Value-Added Fixed Income
The total Value-Added Fixed Income fee budget of $48.1 million, increases by $6.9 million, or 16.7%, in FY 2022. This is mainly due a projected increase in NAV and an increase in assets to the Other Credit Strategies mandate.
Active/ Manager Mandate Passive Fee Type Fidelity HY Bonds Active NAV Loomis Sayles HY Bonds Active NAV Shenkman HY Bonds Active NAV Eaton Vance Bank Loans Active Commingled Fund – NAV Voya Bank Loans Active Commingled Fund – NAV PIMCO EM Debt Hard Currency Active NAV Ashmore EM Debt Hard Currency Active Commingled Fund – NAV Various Managers Private Debt Active Commingled Funds – Committed Capital Various Managers Other Credit Strategies Active Committed Capital
Real Estate
Real Estate Investment Trusts (REITs) The total REITs fee budget of $5.7 million, decreases by $.5 million, or (8.0%), in FY 2022. This change is mainly due to a projected decrease in NAV.
Active/ Manager Mandate Passive Fee Type CenterSquare Global REITs Active NAV Brookfield Global REITs Active NAV
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Pension Reserves Investment Management Board Fiscal Year 2022 Operating Budget
Core Strategy The total Core Strategy fee budget of $27.2 million, stays flat in FY 2022.
Active/ Manager Mandate Passive Fee Type AEW Core Real Estate Active Funded and Performance INVESCO Core Real Estate Active Funded and Performance LaSalle Core Real Estate Active Funded and Performance CBRE Global Investors Core Real Estate Active GAV and Performance Stockbridge Advisors Core Real Estate Active GAV and Performance DivcoWest Core Core Real Estate Active GAV and Performance
Non – Core Strategy The total Non - Core Strategy fee budget of $6 million, increases by $2.3 million, or 60.1%, in FY 2022. This change is mainly due to new fund investments.
Active/ Manager Mandate Passive Fee Type Various Managers Non-Core Active Generally - Committed Capital
Timberland
The total Timberland fee budget of $7.9 million, increases by $.3 million, or 3.9%, in FY 2022 due to increased contributed capital.
Active/ Manager Mandate Passive Fee Type Forest Invest Associates Timberland Active Funded and Performance Campbell Global Timberland Active Funded and Performance
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Pension Reserves Investment Management Board Fiscal Year 2022 Operating Budget
Private Equity
The total Private Equity fee budget of $165.8 million, increases by $30.7 million, or 22.7%, in FY 2022 due to a projected increase in NAV. Private Equity management fees are typically 1.0% to 2.5% of committed capital during the active investment period, and become a percentage of cost of remaining investments later in the life of the partnership.
Active/ Manager Mandate Passive Fee Type Various Managers Private Equity Active Generally Committed Capital
Portfolio Completion Strategies (PCS)
The total Portfolio Completion Strategies fee budget of $87.5 million, increases by $3.0 million, or 3.6%, in FY 2022, due primarily to a projected increase in NAV. PCS and Hedge Fund management fees are typically 1.0% to 2.0% of the NAV of the partnership.
Active/ Manager Mandate Passive Fee Type Various Managers PCS and Hedge Funds Active Generally, NAV
Overlay, Foreign Currency and Other
The total Overlay, Foreign Currency and Other fee budget of $1.0 million, decreases by $.7 million, or (43.6%), in FY 2022 due to the decreasing AUM in liquidating portfolios.
Active/ Manager Mandate Passive Fee Type Parametric Overlay Active NAV Russell Foreign Currency Trading Active NAV Various Managers Private Natural Resources Active Cost of Remaining Investments Wind-Down
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Pension Reserves Investment Management Board Fiscal Year 2022 Operating Budget
Third-Party Service Provider Fees
The FY 2022 budget for Third-Party Service Provider Fees (including Custody and Advisors as well as Research, Audit & Tax, Legal, Governance and Risk Measurement & Investment Analytics) of $22.5 million increases by $3.2 million, or 16.7%. The increase is driven by the growth of Managed Account Platform Provider programs and expansion of PRIM’s Research initiative. Costs in this category are the result of competitively bid contracts.
Custody BNY Mellon currently provides the PRIT Fund with global custody, accounting and performance measurement services. BNY Mellon provides custody for PRIT assets, records all investment transactions for the PRIT Fund, and provides recordkeeping for all participant activity for member retirement systems, including participant performance analysis.
General PRIM employs several professional advisors to provide comprehensive advisory services to staff and the Board including recommendations on asset allocation, benchmarking, communications, operational due diligence, information technology, compliance, human resources and compensation policies. We have also budgeted for implementation expenses associated with the Investment Equity Diversity Program.
Real Estate & Timberlands The FY 2022 budget reflects the advisory fees for a bench of professional real estate advisors and PRIM’s timberland advisor, International Woodland Company, financial reporting costs associated with the real estate leverage program, expenses related to potential direct investments, data tools and other consulting costs.
Public Markets The FY2022 budget reflects contractual fees for Callan and HedgeMark. Callan is PRIM’s Public Market’s advisor. HedgeMark is PRIM’s managed account platform service provider. It also includes fees related to operational due diligence and other consulting costs.
Private Equity The FY 2022 budget reflects the fees for Hamilton Lane, that include private equity advisory, legal services monthly accounting, and detailed performance reporting for the PRIT Fund's Private Equity program. The budget also includes projected fees for new data tools and other consulting costs.
Portfolio Completion Strategies The FY 2022 budget reflects the contractual fees for Aberdeen, New Alpha, HedgeMark and Innocap. Aberdeen and New Alpha are PRIM’s PCS advisors. HedgeMark and Innocap are PRIM’s managed account platform service providers. The budget also includes projected fees for new data tools and other consulting costs.
Research The FY 2022 budget reflects projected fees for new data tools, consultants and other research initiatives.
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Pension Reserves Investment Management Board Fiscal Year 2022 Operating Budget
Audit & Tax KPMG provides annual financial statement audits for the PRIT Fund and PRIM. KPMG also performs an annual examination of the internal controls surrounding PRIM's procurement of investment managers and other third-party service providers and reviews the PRIT Fund's benchmark and performance calculations in accordance with the guidance contained in the AICPA Statement on Standards for Attestation Engagements.
KPMG also provides audit services for PRIM’s Real Estate, Timberland, and certain PCS investments. The audit fees for this work are charged to the underlying investments and are not included in the PRIM budget.
Deloitte provides PRIM with tax advisory services. Real Estate and Timberland property level tax return preparation fees and tax advisory fees are charged to the underlying properties and, as such, are not a part of the PRIM budget. However, the general tax advisory work is paid directly by PRIM.
Legal PRIM retains outside counsel as necessary to provide legal services to PRIM. Outside legal expenditures can be difficult to predict and have historically fluctuated significantly based on the nature of activities of the PRIT Fund and PRIM.
Governance Institutional Shareholder Services (ISS) provides a comprehensive analysis of proxy issues and vote recommendations for the PRIT Fund's domestic and international securities in accordance with PRIM's custom proxy guidelines. Cortex Applied Research Inc., is engaged to administer the Board self-evaluation process. The governance budget also includes annual membership fees associated with participation in the Council of Institutional Investors and anticipated costs for hosting PRIM Board Education sessions.
Risk Measurement and Investment Analytics PRIM utilizes MSCI’s BarraOne, a single platform multi-asset class investment risk measurement tool. Other investment analytical tools include FactSet, eVestment, Bloomberg, and others.
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Pension Reserves Investment Management Board Fiscal Year 2022 Operating Budget
Operations
The FY 2022 Operations budget of $20.7 million increases $1.8 million or, 9.3%, reflecting primarily an increase in Compensation and Employee Benefits due to projected new PRIM staff positions.
Compensation & Employee Benefits The FY 2022 Compensation budget includes allocations for additional positions and potential compensation increases for existing employees based upon Board approved salary bands.
Per PRIM’s Compensation Philosophy, to ensure PRIM remains competitive with market trends, a comprehensive compensation level analysis was conducted in 2018 by PRIM’s compensation consultant, McLagan. To make incremental progress within these Board approved salary bands we have included amounts in the FY 2022 budget for potential base salary increases and for potential promotions. The budget for employee benefits consists primarily of dental, vision, and disability costs for employees as well as a contingency to cover potential unemployment claims since PRIM does not participate in the state's unemployment insurance pool. The budget also includes estimated Medicare taxes and Massachusetts Paid Family Medical Leave for all employees.
FY 2022 Budget Compensation $17,219,000 FY 2021 Budget Compensation $15,554,000 Year-over-year change $1,665,000
New positions and benefits increase $1,335,000 Potential compensation increases $330,000 Year-over-year change $1,665,000
Occupancy The occupancy budget includes expenses associated with office space, including rent, maintenance charges, and utilities.
PRIM's office building at 84 State Street is owned by PRIT Core Realty Holdings LLC and is managed by INVESCO. PRIM occupies the entire second and third floors of the building (21,500 rentable square feet).
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Pension Reserves Investment Management Board Fiscal Year 2022 Operating Budget
Insurance The budget includes insurance premium costs for various business and liability policies. PRIM's current insurance policies are summarized in the following table:
Policy Type Coverage Deductible Fiduciary Liability $15,000,000 $ 250,000 Commercial Crime $10,000,000 $ 100,000 Employment Practices Liability $ 1,000,000 $ 50,000 Workers Compensation $ 1,000,000 N/A Commercial General Liability $ 1,000,000 N/A Commercial Property $ 839,800 $ 250 Umbrella Liability $ 4,000,000 $ 10,000 Hired Auto $ 1,000,000 N/A
General Office Expenses This budget category includes expenses relating to office operations including postage, office supplies, copying, printing, telephone expenses, temporary labor and office infrastructure.
Computer and MIS Expenses The budget for Computer and MIS Expenses shows an increase due to the expected enhancement of PRIM’s infrastructure required for the increased use of quantitative tools. This category also includes telecom, internet service providers, hardware, software and support agreements, offsite data storage, and equipment for the expected growth of staff.
Travel, Professional Development & Dues and Subscriptions This budget category represents costs associated with due diligence travel, ongoing professional education of PRIM Board members and staff, including related travel expenses and dues & subscriptions, which includes membership dues in professional associations and subscription costs for professional journals, investment industry publications, and newspaper subscriptions. The budget includes tuition reimbursement charges (e.g., for approved CFA and higher education courses), required continuing education costs for maintaining professional licenses (e.g., CPA license), and attendance at professional conferences and seminars. PRIM is committed to supporting its Board members and staff in their pursuit of professional development.
Client Service Currently, 99 of the Commonwealth's 104 retirement systems invest in the PRIT Fund. The client service budget allows for PRIM-sponsored client conferences and on-site client meetings. This budget includes the cost of traveling to client meetings, conferences, and related activities. Additionally, the costs associated with printing and binding the PRIT Fund's Comprehensive Annual Financial Report is included in this budget.
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Pension Reserves Investment Management Board Fiscal Year 2022 Operating Budget
Key Assumptions
Estimated Assets Under Management and Asset Allocation in FY 2022 Many of the budgeted expenses for FY 2022 are based upon the estimated average assets under management and the estimated average actual asset allocation.
The estimated average assets under management for FY 2022 is $90 billion. To estimate PRIM’s FY 2022 average assets under management, the beginning AUM of FY 2022 (July 1, 2021) was estimated to equal the PRIT Fund assets under management as of February 28, 2021, the most current and available information when creating this budget. The ending AUM of FY22 (June 30, 2022) was estimated to increase by NEPC’s expected 10 year return forecast of 5.8%. The estimated average AUM of FY 2022 is the average of the estimated beginning and ending AUM, which is approximately $90 billion. Please note that future investment performance is not predictable and actual performance will vary.
The estimated asset allocation in FY 2022 is based on the current actual asset allocation of the PRIT Fund and projected future allocation changes.
Performance, Incentive, or Carried Interest Fees No investment performance, incentive, or carried interest fees are budgeted in FY 2022. These fees vary dramatically from year-to-year and are not predictable.
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