The Failure of Private Equity Investments at NYCERS

Below are two screen shots from the June 17, 2025 NYCERS Investment meeting. The charts displayed were prepared by the Comptroller's office and presented to the NYCERS trustees.

The first chart alleges to show the rate of return on alternative investments in the NYCERS investment portfolio. The second chart alleges to show the rate of return relative to their targets measured in plus or minus basis points.

The Comptroller provided no documentation on how the amounts were arrived at. I consider the amounts in these charts to be inflated because the values listed were provided by the general partners running the individual investments and are just estimates.

But even accepting the figures as correct, we see a huge problem with the private equity class. For over ten years it has been 300 basis points (3%) under its target of the Russell 300 plus 300 basis points.

In plain English, NYCERS private equity investments performed exactly like a Russel 3000 index fund.

As of June 30, 2024 NYCERS reported:

• a Russel 1000 index fund worth $12.9B
  • with an investment fee of only $269,000 for FY-2024, and
• private equity investments at a value of $8.46B
  • with $163.4 million in investement fees plus $64.8 million in organizational costs for FY-2024.

On top of this obvious performance failure, the index fund is totally liquid and pays dividends every year from all the stock holdings in the fund.

The trustees are aware of this situation but continue to hire private equity managers. They did, however, dump some private equity managers in March of this year.

Retreat from Indexing or How to Make Wall Street Rich

In March, 2000 the NYCERS pension fund was worth $44.4B. Half of that, $22.3B (50+% of assets), was invested in US equity Russell-3000 index strategy run by two firms, Merrill Lynch and Barclay Global. Prior to 2000 there had been only one manager, Bankers Trust/Deutsche Bank fund. It cost NYCERS $438,000 in fees to run $22.3B. As early as 1980 NYCERS had been a pioneer in using indexing for its US equity assets. In particular, the Russell-3000 index strategy is profitable, comprehensive, and low cost. Perfect for a mature pension fund like NYCERS.

As of March, 2013 the NYCERS pension fund was worth $46.3B. But the Russell 3000 index fund has been cut and a lot redundant index funds have been added. The total US equity index assets is now $14.3B but with annual fees equal to $2.3M. You can see the details: below:

• Russell 3000 $6.325B, 20102 annual fees equal to $456,000
• S&P 500 ---- $3.978B, 20102 annual fees equal to $103,000
• S&P 500 ---- $0.340B, 20102 annual fees equal to $327,000
• Russell 2000 $0.198B, 20102 annual fees equal to $ 39,000
• S&P 400 ---- $2.462B, 20102 annual fees equal to $ 82,000
• Russell 1000 $1.033B, 20102 annual fees equal to $1,294,000

It's like like the trustees have lost their way. All of the added indexes are subsets of the Russell-3000. There is no value gained by this proliferation of funds. Only the managers are gaining with added fees. This fall off in the index strategy, however, is the root cause of the explosion in management fees. The trustees cut this strategy to free up assets for other less valuable strategies, like private equity.