The Pennsylvania Municipal Retirement System is getting into private markets for the first time in its history.
After de-risking its U.S. domestic equity strategy four years ago, the Harrisburg-based pension’s CEO and CIO Timothy Reese is now turning towards private credit and private infrastructure to generate yield and diversify the $3.6 billion portfolio.
The former Pennsylvania state treasurer and his team plan to enter the private markets through core commingled evergreen vehicles, the stakes of which will be funded by selling off some direct real estate and drawing capital from an aggregate bond fund. Reese doesn’t expect to offload any domestic equity holdings (which currently make up about a third of the portfolio). By next year, he hopes that 5 percent of the overall portfolio will be in private markets.
“Now’s a good time to enter these two asset classes where we can gain some return,” Reese told Institutional Investor.
The allocator said private assets would provide an attractive yield and help the pension fund diversify away from traditional fixed income and equities, while also generating stable income for the portfolio. He also noted that climate change, aging infrastructure in the U.S., and the federal government shrinking its commitments should drive more capital into private infrastructure projects.
“Entering these asset classes is the best thing PMRS can do because the strategy has grown,” Reese said, adding: “We could grow to north of $4 billion by the end of the year.”
This new venture into private assets follows Reese and his team fortifying back-office operations, rebalancing the portfolio, and upping its credit rating 25 basis points to 5.5 from 5.23. After the outbreak of Covid-19, the Allocators’ Choice Award finalist “felt like this market that we’ve known for the last decade will not continue.”
So in 2021, the investment team sought to get ahead of that sea change by reducing the fund’s number of active domestic equity managers and putting more money into investment-grade fixed income to de-risk the portfolio. “Frankly, I’m concerned about the expansion of the U.S. equity market, particularly the Mag 7,” Reese said, referring to the seven most dominant tech stocks.
Because the pension is fully funded, Reese said he’s not forced to play catch-up and has ample liquidity. “I have the luxury of staying away from certain vintages,” he said.
PMRS joins a growing number of institutional investors upping their allocations to private markets, with new research from Nuveen showing that 66 percent plan to increase allocations to private assets over the next five years. More than 90 percent now hold both private equity and private credit, well above the 45 percent that did in 2021. Private infrastructure in particular saw a big year-over-year increase, with half of the surveyed allocators planning to increase allocations — up from 35 percent in 2024.
“You have to remember your policy and remember we’re long-term investors,” Reese said, noting that “there’s a lag to everything, even policy.” That said, he believes the fundamentals have changed since 2020 and will be around for a while.
“In America and beyond, we are in a new normal,” he said. “I believe it began with Covid. But now it’s entered a new phase in which we see it affecting how governments respond to national issues.”
