Exclusive: South Carolina Hits the ‘Sweet Spot’ with New Co-Investment Program

Investment commission’s staff explains how the $31.5 billion fund is readying itself for new PE opportunities.

A short time ago, the South Carolina Retirement System Investment Commission (RSIC) announced the formation of a  new private equity co-investment program with GCM Grosvenor that’s designed to position it as a preferred provider of co-investment capital to general partners.

CEO Michael Hitchcock and Director of Risk James Wingo sat with CIO to discuss the merits and goals of the new program that’s expected to grow over time to constitute approximately 30-40% of its private equity portfolio.

CIO recently held an interview and podcast with Alaska Permanent Fund Corp’s Chief Investment Officer Marcus Frampton, during which he explained how his own co-investment program was able to generate a return of over 60%.

The RSIC selected GCM Grosvenor after a competitive process that launched in 2017, which assessed  myriad factors and characteristics, including overall cost structure, quality of their team, track record, etc.

GCM was also selected, in part, because of its relationships that can help RSIC expand into the middle market, Hitchcock and Wingo said.

“They have two sleeves to the mandate—one a discretionary sleeve where GCM has full discretion on investment decisions as well as sourcing the opportunities. They also support our underwriting process with opportunities that are sourced from us—in that way they can act in an advisory capacity where the decisions still rest with the RSIC,” Hitchcock said.  “With a portfolio of co-investments, we have the opportunity to earn the gross of fee return as opposed to a net of fee return through a fund investment. It’s a way for us to capture that additional return when we’re taking the same amount of risk as being invested in a fund.”  

“We see it as more of the ability to reduce the private equity program’s overall cost, rather than targeting a particular return,” Wingo said. 

“The goal of the program is to be a ready source of capital—be able to react quickly when GPs come to us with opportunities. The ability to make a decision and to be able to deploy capital is something that’s very valuable for GPs when it comes to co-invests,” Hitchcock added. 

“We have relationships with GPs across several asset classes, so I think we’ll eventually see these opportunities in other asset classes. With time, I think we could see the program move into other asset classes such as private credit,” said Hitchcock.

Lots of North American institutional investors are looking to reap the benefits of co-investments, such as the California Public Employees’ Retirement System (CalPERS), whose new CIO Ben Meng has been advocating for a more robust co-investment program. The California State Teachers’ Retirement System (CalSTRS) is pushing for more co-investments as well

“The design of our co-investment process and partnership has been a long journey; we’ve come to realize the goal for us is to become a preferred capital provider to GPs and to build relationships with those GPs. It’s really all about that in the process. With that, we’ve designed the process to have a streamlined approach, whereas in the past maybe we’ve taken a bit longer to get to a firm investment decision,” added the CEO.

“The process has been streamlined and we now have a one-week target timeframe for initial indication of interest and then a four-week timeframe from receipt of materials to closing. Having that partnership and infrastructure with GCM allows us to reliably execute on that and our GPs are seeing that, so we think that clarity of process is important to GPs,” Hitchcock continued.

“The investment approvals are happening at the staff level, rather than board level, which we’re seeing is an important asset within the GP community,” WIngo said.

“We’re very intentional about our approach to co-invest; we see it as an opportunity to build relationships with our GPs, we try to have excellent communication as well with our GPs, we’re focused on being good partners,” he added.

“We’ve been able to design a program that allows us to gain confidence about a decision much more quickly, but without sacrificing the quality of our underwriting—so it hits the sweet spot for both us and the GPs,” Hitchcock said. 

“We are delighted and honored that RSIC has chosen us as its strategic partner for this initiative,” added Jon Levin, president of GCM Grosvenor, in a prepared statement. “We look forward to working with RSIC to build a world-class co-investment program that helps it achieve its long-term objective of providing attractive returns to its pensioners.”

Related Stories:

Marcus Frampton: New Sheriff in Juneau

CalPERS Private Equity Co-Investment Plan Could Be Announced Next Month

CalSTRS Wants to Double Co-Investments


Tags: , , ,