New York City Pensions Paid Wall Street $1 Billion Last Year

(Bloomberg) -- New York City's five pension funds paid Wall Street investment managers $1 billion last fiscal year as they plowed more money into expensive private equity and real estate funds in pursuit of large returns.

Investment expenses rose almost 12 percent for the fiscal year ending June 30, according to the city's comprehensive annual financial report. The city's $200 billion pension system returned 8.7 percent for the year after paying 271 money managers.

State and local retirement funds have piled into riskier asset classes such as private equity, distressed debt and real estate over the past decade, seeing the higher-fee investments as a way to achieve the more than 7 percent returns they count on each year. The city's funds for police officers, firefighters, teachers, school administrators and civilians are $48 billion short of the assets needed to cover promised benefits, and higher-than-targeted returns would help them make up that lost ground.

New York City's private equity program had a market value of $12 billion, or about 6 percent of total assets, and the pensions have committed another $8.2 billion. The pensions made $2.5 billion in new commitments in fiscal 2018 compared with $1.6 billion the previous year.

Real estate commitments rose by $1.2 billion in fiscal 2018 to a total of $12.7 billion, according to the annual report.

Since the late 1990s, the city's private equity investments have returned 10.3 percent after fees, just 0.1 percentage point better than the Russell 3000. Starting in 2016, the city required its private equity managers to provide better disclosure of expenses, including incentive fees, portfolio company charges and fund expenses.

To contact the reporter on this story: Martin Z. Braun in New York at mbraun6@bloomberg.net

To contact the editors responsible for this story: James Crombie at jcrombie8@bloomberg.net, Michael B. Marois, William Selway

©2018 Bloomberg L.P.