Penn PSERS Approves up to $25B Public Equity Mandate With BNY Investments

The Pennsylvania Public School Employees’ Retirement System approved a sizable passive public equity management mandate of up to $25 billion to BNY Investments.

Penn PSERS will initially invest approximately $16 billion in a passive U.S. equity mandate that will be invested in collective investment trusts tracking the Standard & Poor’s 1500 Index, while another $4 billion will go to a developed markets ex-U.S. equity mandate tied to the MSCI World ex-U.S. index.

The selection of indexes means Penn PSERS would not have any exposure to SpaceX after its recent initial public offering. The S&P 1500, like all S&P Dow Jones indexes, will not include the high-profile company until it meets the index provider’s requirements that it be public for at least 12 months and that it show profitability under generally accepted accounting principles. The MSCI benchmark excludes U.S. companies, so it would also not include the space company. Other index providers have adjusted their inclusion criteria to be able to add the company sooner than would otherwise be possible.

The analysis of the BNY mandate by the Penn PSERS staff for its board included a review of three risks: benchmark mismatch, concentration risk and CIT structure risk, as well as ways in which BNY can mitigate them. The memo, written by Carl Lantz, director of Penn PSERS’ investment office, and Steven Heuer, a senior portfolio manager, identified mitigating factors for benchmark mismatch, including “Individual stock liquidity and expected trading cost information; disciplined risk control procedures; and [minimizing] tracking error through careful index replication.”

Regarding concentration risk, as the initial $16 billion investment equals more than 13% of the $123.4 billion AUM of the firm’s S&P 1500 Index strategy, PSERS’ staff identified as a mitigating factor the fact that the passive investment is a “commoditized product [that] can be efficiently transitioned to another manager.”

As a mitigating factor for any risk related to the CIT structure of the investments, the staff wrote that “CITs have their own compliance and risk control operation groups overseeing them at BNY while SMAs do not.”

“BNY Mellon has been a trusted partner to PSERS and the Commonwealth of Pennsylvania for more than three decades,” PSERS Board of Trustees Vice Chair Susan Lemmo said in a statement. “The board looks forward to continuing and expanding that relationship in support of the system’s long-term investment objectives.”

The board also authorized investment commitments of up to €100 million ($115.2 million) to PAI Mid-Market Fund 2 and up to $75 million to the TPG Peppertree Fund XI-A.

The PAI Mid-Market Fund 2 will seek to acquire controlling interests in 11 to 13 “real economy” companies, according to the recommendation of Penn PSERS’ private equity portfolio manager, Jennifer Sassani. The fund will target firms with an established market position that have “structural tailwinds, mission-critical products and services, pricing power, a diversified customer base, and strong free cash flow.”

The board also greenlit contract negotiations with its current general investment consultant, Cerity Partners Retirement Plan Advisors.

“Cerity brings deep experience serving institutional investors, and the board looks forward to continuing to benefit from that expertise as PSERS pursues its long-term investment goals,” Penn PSERS Board of Trustees Chair Richard Vague said in a statement.

Penn PSERS also announced that Eric DiTullio, a member of the Seneca Valley School Board, was re-elected as the school board representative on its board of trustees, with his new term beginning January 1, 2027, and lasting until December 31, 2029. DiTullio ran unopposed.