Alternatives, Asset Allocation, Asset Managers, Asset Servicing, Consultants, Defined Benefit, Institutional Investors, Pension Funds, Public Funds, Uncategorized

MOSERS Seeks Consultant for Illiquid Alternatives

The $8.5 billion Missouri State Employees’ Retirement System (MOSERS) has issued a request for proposals seeking a specialty consultant for illiquid alternatives. The system’s current allocation to illiquid alternatives is approximately 25% of assets, or about $2 billion, according to MOSERS’ CIO Seth Kelly.

Seth Kelly, CIO of MOSERS

MOSERS hired a Board Investment Consultant, Verus, to fill the general consulting duties on April 27 of this year, as reported by IA. The investments team also issued an RFP in October for a Specialty Consultant for Public Markets, as reported by IA. The pension fund will be restructuring the scope of services provided by its consultants, but MOSERS will not be seeking another general asset consultant, Kelly clarified. “I expect to hire specialty consultants to assist the CIO and staff with manager selection, research, and due diligence—hiring the SC-IA is part of that transition,” he said.

MOSERS’ previous general asset consultant, Summit Strategies Group, was acquired by Mercer earlier this month on November 15. “The fund is restructuring its consulting arrangements to achieve more independence and accountability,” Kelly told IA. “[Investment] staff will have consultants that provide manager selection services and the Board will have the Board Investment Consultant (BIC) to provide advice on asset allocation and oversight.”

Focusing on illiquid alternatives assets

“In a consultant, we are looking for a depth of resources in the illiquid alternatives asset classes, including private equity and distressed debt,” Kelly said. “Relationships matter, as well as a depth of research to help us narrow the field of the best illiquid alts managers,” he said. “The ideal consultant will have a unique approach, a large enough staff size and recommend the best allocation size to managers, which should be the best path to high returns in this space.”

The amount that will be paid to the new illiquid alternatives consultant is unknown at this time, Kelly told IA. “It [the fee paid] depends on the proposal that is selected, the services the specific SC-IA will provide, and on contract negotiations,” he added. “There is always unease surrounding fees—every dollar you pay is a dollar you don’t keep,” Kelly said. “Part of the incumbent [illiquid alternatives consultant’s] job will be to work with managers we already have and provide suggestions—we don’t want to end up with more managers than we can manage.”  

MOSERS currently has some 50 managers on its roster, including illiquid alternatives managers Blackstone real estate, JLL Partners, and Oaktree, in addition to smaller Asian private equity managers.

The fund is restructuring its consulting arrangements to achieve more independence and accountability.

Change in general consultant strategy

As reported by Reuters in June 2010, Mercer was sued by the state of Alaska for $2.8 billion in a lawsuit, first filed in December 2007, that accused the consultant, with nearly $14 trillion in AUM, of making several errors in calculating employee pension and health-care obligations—Mercer agreed to pay $500 million in response to a lawsuit with the underfunded state pension plans. Mercer admitted no wrongdoing, and $100 million of the settlement was covered by its insurance. As a result, Mercer no longer wants to work with public funds, Kelly told IA.

The MOSERS board wants a consultant that is independent of any investment staff relationships—cannot work with both the investment staff and the board, noted Kelly. As Kelly told IA in October: “The Board wants to create a clear line of responsibility—if a manager gives the CIO bad advice, that’s the CIO’s responsibility. In the past, the Board had the impression that the services required from the consultant could appear conflicted and, therefore, result in advice that may not be impartial because the only consultant served both the Board and staff—I believe the Board has achieved what they desired with the current setup.”

The BIC provides investment advisory and oversight services directly to the MOSERS Board of Trustees, Kelly said. “The BIC assists the MOSERS Board in overseeing the system’s investment management functions, developing investment policy, and executing Board-approved investment policy,” he added. “The BIC is expected to act solely on behalf of the MOSERS Board—the BIC will not provide advisory services to management and investment staff of MOSERS.” The BIC is a new role at MOSERS.

This resulted in some overlap between the role of the board investment consultant (BIC) and chief general asset consultant at the time, noted Kelly. “When Summit was purchased by Mercer, it gave MOSERS the opportunity to transition to a different consulting arrangement, which we are in the midst of now,” he continued.

The Board wants to create a clear line of responsibility—if a manager gives the CIO bad advice, that’s the CIO’s responsibility.

Specialty consultant will have a full plate

MOSERS expects to have conversations with its consultant about how to best use illiquids to achieve its portfolio objectives. “For instance, like the circumstances under which funds of funds might be the best approach. The SC-IA will give implementation approaches and choose a manager that best fits MOSERS’ portfolio needs,” Kelly said.

The new consultant will be required to monitor approximately 16 manager relationships, the RFP stated. The consultant will be required to conduct initial due diligence into an external manager at the office of that manager, but subsequent meetings may be conducted in other locations. “We need a consultant to help us redefine our approach to these markets, which we haven’t been wildly successful in—judging from the numbers, we need someone to help us figure out the best way to succeed,” Kelly noted.

The new SC-IA’s role with regard to the defined contribution and College and University Retirement Plan (CURP) will be more limited than it will be with the defined benefit plan. MOSERS administers two defined contribution plans, including the State of Missouri Deferred Compensation Plan for state employees and retirees and the CURP for higher education faculty employees. The Deferred Compensation Plan has approximately 65,000 participants and $2.2 billion in assets. The CURP has approximately 3,100 members and $100 million in assets.

The consulting contract will span three years. The illiquid alternatives consultant is not expected to attend all board meetings, but may be asked to attend occasionally, according to the RFP. The expectation should be for the SC-IA to attend at least four meetings per year, one on-site and three via teleconference.

The new consultant’s contract will span three years. November 26 was the deadline for respondents to submit questions about the RFP to MOSERS; answers to those questions will be posted on December 3. The deadline for respondents to submit proposals is December 17 at 4:30 p.m. Central Time. MOSERS will announce the winner on February 1, 2019.

Quality of responses is better than quantity, noted Kelly. “We will only interview high-quality SC-IA responses—if we only like two, we’ll just interview those two.  But we want to see responses from as many candidates as possible,” said Kelly. MOSERS anticipates conducting three or fewer searches for managers in the illiquid alternative space in 2019 and annually going forward, according to the RFP.

 

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