osers transition plan update & planning the coordination ... · osers real estate pacing – no...

Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. Nothing in this document should be construed as legal or investment advice. Please consult with your independent professional for any such advice. To protect the confidential and proprietary information included in this material, it may not be disclosed or provided to any third parties without the approval of Aon Hewitt.

OSERS Transition Plan Update & Planning the Coordination of the OSERS + NPERS Private Equity and Real Estate Allocations May 2018

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Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.

Overview

Legislative Bill 447 transitioned the duty and authority to invest the assets of the Omaha School Employees’ Retirement System (OSERS) to the Nebraska Investment Council (Council) and the State Investment Officer effective January 1, 2017

The Council approved a long-term target asset allocation policy for the OSERS portfolio that mirrors the asset allocation policy of the Nebraska Schools, State Patrol, and Judges defined benefit plans – This target allocation policy was supported by the Asset / Liability study that was performed by Aon

Hewitt Investment Consulting (AHIC) During 2017, the liquid portion of the OSERS portfolio was transitioned to better align OSERS with the

Nebraska Schools, State Patrol, and Judges defined benefit plans Given OSERS’ large allocation to illiquid assets, it will likely take many years for the portfolio to reach

the long-term asset allocation targets that have been approved by the Council This presentation provides an update on the OSERS portfolio transition process and on the

forecasted run-off periods of OSERS’ legacy illiquid allocations

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OSERS Portfolio – Actual Allocation vs. Target Allocation

Allocation as of 12/31/2016

Allocation as of 12/31/2017

Interim Target (12/31/2017)

Long-Term Target Asset Allocation

U.S. Equity 13.4% 20.0% 21.0% 27.0%

Non-U.S. Equity -- 9.6 9.0 11.5

Global Equity 18.5 13.4 14.5 19.0

Fixed Income (Core) 11.5 24.0 25.0 20.0

Fixed Income (RS) -- -- -- 10.0

Hedge Funds 9.1 2.4

30.5

--

Real Assets 14.9 3.4 --

Real Estate 21.1 15.8 7.5

Private Equity 10.3 11.2 5.0

Cash 1.4 -- -- --

Total Fund 100.0% 100.0% 100.0% 100.0%

The table above depicts the asset allocation of the OSERS portfolio at year-end 2016 and year-end 2017, as well as the Interim and Long-Term Target Allocations

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OSERS Portfolio – Illiquid Assets + Forecasted Run-Off Period

As of 12/31/2017

(1 Year Out) As of 12/31/2018

(3 Years Out) As of 12/31/2020

(5 Years Out) As of 12/31/2022

(10 Years Out) As of 12/31/2027

U.S. Equity 20.0% -- -- -- --

Non-U.S. Equity 9.6 -- -- -- --

Global Equity 13.4 -- -- -- --

Fixed Income – Core 24.0 -- -- -- --

Fixed Income (RS) -- -- -- -- --

Hedge Funds 2.4 -- -- -- --

Real Assets 3.4 1.2% 0.9% 0.5% 0.1%

Real Estate 15.8 15.8 11.2 6.2 3.4

Private Equity 11.2 11.2 8.5 5.9 1.4

Cash -- -- -- -- --

Total Fund 100.0% -- -- -- --

Total Legacy Illiquid 32.8% 28.2% 20.6% 12.6% 4.9%

The table above provides a forecast for how long it might take OSERS’ legacy illiquid investments to run off – Please note that 2.5% of the Real Estate allocation is currently comprised of legacy core Real Estate investments

that will be retained long-term • As such, the “Real Estate” and “Total Legacy Illiquid” line items could be reduced by ≈2.5% in each period

shown above Several factors, including market performance and the speed that unfunded commitments* are called, could

meaningfully impact the run-off analysis shown above

*The OSERS portfolio currently has over $100 million in outstanding unfunded commitments to closed-end vehicles

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Legacy OSERS Illiquids – Vintage Year, Commitment Amount, Remaining Unfunded Commitments, Current NAV

OSERSSummary of Legacy Illiquid InvestmentsAs of 9/30/2017

Partnership NameVintage

Year CommitmentUnfunded

CommitmentNet Asset

ValueSPC I-IV 2001 $161,142,046 $23,014,051 $72,017,145FCP Fund II 2011 30,000,000 5,443,873 24,505,789Stonetree IV 2012 53,152,755 12,440,779 35,349,976AAVIN Mezzanine Fund, LP 2014 5,000,000 2,375,000 2,006,403AAVIN Equity Partners II, LP 2015 25,000,000 14,971,351 9,597,660Total Private Equity Portfolio 274,294,801 58,245,055 143,476,973BTG Pactual Timberland 2004 25,000,000 0 26,918,051JP Morgan Maritime Global 2010 25,000,000 682,971 16,093,324Total Real Assets Portfolio 50,000,000 682,971 43,011,375UBS Trumbull Property Fund 1995 33,615,067 0 14,484,313JPMorgan Strategic Property Fund 1998 48,165,726 0 14,661,218Fremont Strategic Property Partners II, L.P. 2004 10,000,000 0 568,553Almanac Realty Securities Fund VI, L.P. 2011 25,000,000 3,750,000 10,031,174Mariner Real Estate Partners III, L.P. 2011 50,000,000 0 31,624,58225 Capital Residential Mortgage Opportunities Fund 2012 50,000,000 0 43,178,338JP Morgan India Property Fund II 2012 25,000,000 3,389,817 23,153,642Mariner Real Estate Partners IV, L.P. 2014 60,000,000 25,050,000 46,657,742Almanac Realty Securities Fund VII, L.P. 2015 30,000,000 18,122,517 13,105,163Total Real Estate Portfolio 361,338,022 50,312,334 197,464,724Total Portfolio $685,632,823 $109,240,360 $383,953,072

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OSERS Portfolio – Projecting a Multi-Stage, Multi-Year Transition

As of 12/31/2017

(1 Year Out) As of

12/31/2018

(3 Years Out) As of

12/31/2020

(5 Years Out) As of

12/31/2022

(10 Years Out) As of

12/31/2027

Long-Term Target

Allocation

U.S. Equity 20.0% 21.5% 23.0% 26.0% 27.0% 27.0%

Non-U.S. Equity 9.6 9.5 10.0 11.0 11.5 11.5

Global Equity 13.4 15.5 16.5 18.0 19.0 19.0

Fixed Income – Core 24.0 25.0 25.0 22.0 20.0 20.0

Fixed Income (RS) -- -- 5.0 8.0 10.0 10.0

Hedge Funds 2.4 -- -- -- -- --

Real Assets 3.4 1.2 0.9 0.5 0.1 --

Real Estate 15.8 15.8 11.2 8.1 7.5 7.5

Private Equity 11.2 11.2 8.5 6.3 5.0 5.0

Cash -- 0.3 -- 0.1 -- --

Total Fund 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Total Legacy Illiquid (ex- Core RE)

32.8% (≈30.3%)

28.2% (≈25.7%)

20.6% (≈18.1%)

12.6% (≈10.1%) 4.9% (≈2.4%) --

Total Illiquid 32.8% 28.2% 20.6% 14.9% 12.6% 12.5%

The table above provides a projection of what the transition to OSERS’ Long-Term Target Allocation might look like over the next 10 years – This projection is based in large part on our assumptions for how quickly capital will be returned from OSERS’

legacy illiquid managers

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OSERS Transition Year 2 – Interim Target

Interim Target Permissible Range U.S. Equity 21.0% 16.0% -- 26.0%

Non-U.S. Equity 9.0% 4.0% -- 14.0%

Global Equity 14.5% 9.5% -- 19.5%

Total Equity 44.5% 34.5% -- 54.5%

Core Fixed Income 25.0% 20.0% -- 30.0%

Legacy Illiquid / Alternatives 30.5% N/A

Total Fund 100.0% --

The table above provides the interim target asset allocation for OSERS during year two of the transition The permissible ranges have purposefully been kept relatively wide owing to uncertainty in the size of the

Legacy Illiquid / Alternatives allocation – Large amount of unfunded commitments outstanding, appreciation / depreciation, distributions, etc.

The Interim Target allocation shown above differs somewhat from the “1 Year Out – As of 12/31/2018” allocation projection shown on the previous slide − We note there is a lot of uncertainty surrounding when capital will be returned from the legacy OSERS

illiquids managers, and as such there are fairly wide error bands around our projections • Should the legacy illiquid allocations return capital much more quickly than we are anticipating during

2018, we will recommend revisions to the above Interim Target allocations accordingly

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Appendix I: Illiquids Pacing Analysis -- OSERS + NPERS

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Overview

The following slides contain the pacing analysis on the legacy OSERS illiquids that was used to formulate the projections in the previous section

The next three slides contain run-off analysis (i.e., no new commitments) for the following OSERS’ allocations: – Real Estate – Private Equity – Real Assets

Following these slides are two slides that project when the Council will need to start making Real Estate and Private Equity commitments within the OSERS portfolio to maintain the portfolio’s long term target allocations to these asset classes – We are currently projecting starting commitment activity for both Real Estate and Private Equity in

2021 The final two slides contain pacing analyses for the NPERS Real Estate and Private Equity programs

– Ultimately, the goal will be to merge the NPERS and OSERS private markets pacing schedules, but differing asset growth rates between NPERS and OSERS (driven primarily by differing net cash-flow profiles) may make this a challenge • Our plan is to re-evaluate the feasibility of merging the pacing analyses once we are closer to

starting commitment activity within OSERS

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OSERS Real Estate Pacing – No Further Commitments (I.e. Runoff Analysis) OSERS Real Estate portfolio accounts for 15.4% of the total plan and is currently split 17% Core /

83% Non-Core If the OSERS portfolio makes no new commitments to real estate, the portfolio will be 100% Core

by ≈2026

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Based on Q3 2017 Portfolio NAVs

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OSERS Private Equity Pacing – No Further Commitments (I.e. Runoff Analysis)

0%

2%

4%

6%

8%

10%

12%

14%

Current 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

Projected NAV of Private Equity as a Percent of Total Program

1.8% Asset Growth 3.3% Asset Growth4.8% Asset Growth Target Policy Allocation

2018 2019 2020 2021 2022 2023 2024 2025 Private Equity NAV @ Beginning of Year $143.5 $141.6 $130.7 $115.1 $99.8 $84.3 $69.1 $55.1 Capital Called (3.9) (10.7) (4.8) (3.2) (1.7) (1.1) (0.5) (0.2)

Capital Called - Existing Commitments (3.9) (10.7) (4.8) (3.2) (1.7) (1.1) (0.5) (0.2) Capital Called - New Commitments 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Distributions 10.5 39.9 37.9 33.2 28.7 25.2 21.2 17.1 Distributions - Existing Commitments 10.5 39.9 37.9 33.2 28.7 25.2 21.2 17.1 Distributions - New Commitments 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net Cash Flow 6.6 29.2 33.1 30.0 27.0 24.2 20.7 16.9 Appreciation 4.7 18.3 17.5 14.8 11.5 9.0 6.7 4.8

Appreciation - Existing Commitments 4.7 18.3 17.5 14.8 11.5 9.0 6.7 4.8 Appreciation - New Commitments 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Private Equity NAV @ End of Year $141.6 $130.7 $115.1 $99.8 $84.3 $69.1 $55.1 $43.1 Private Equity as % of Total Program (1) 11.2% 10.0% 8.5% 7.2% 5.9% 4.7% 3.6% 2.7%

Annual Commitment PaceIn $ Millions

Year FoF Primary Co-Invest Total2018 0.0 0.0 0.0 0.02019 0.0 0.0 0.0 0.02020 0.0 0.0 0.0 0.02021 0.0 0.0 0.0 0.02022 0.0 0.0 0.0 0.02023 0.0 0.0 0.0 0.02024 0.0 0.0 0.0 0.02025 0.0 0.0 0.0 0.02026 0.0 0.0 0.0 0.02027 0.0 0.0 0.0 0.02028 0.0 0.0 0.0 0.0Total 0.0 0.0 0.0 0.0

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OSERS Real Assets Pacing – No Further Commitments (I.e. Runoff Analysis)



2018 2019 2020 2021 2022 2023 2024 2025 Real Assets NAV @ Beginning of Year $16.1 $15.3 $13.3 $11.6 $9.4 $7.8 $6.2 $4.6 Capital Called (0.0) (0.0) (0.0) (0.0) (0.0) 0.0 0.0 0.0

Capital Called - Existing Commitments (0.0) (0.0) (0.0) (0.0) (0.0) 0.0 0.0 0.0 Capital Called - New Commitments 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0



Appreciation - Existing Commitments 0.6 1.7 1.2 0.7 0.5 0.3 0.1 0.0 Appreciation - New Commitments 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Real Assets NAV @ End of Year $15.3 $13.3 $11.6 $9.4 $7.8 $6.2 $4.6 $3.4 Real Assets as % of Total Program (1) 1.2% 1.0% 0.9% 0.7% 0.5% 0.4% 0.3% 0.2%

0%

1%

2%

3%

4%

5%

6%

Current 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

Projected NAV of Real Assets as a Percent of Total Program

1.8% Asset Growth 3.3% Asset Growth 4.8% Asset Growth

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OSERS – New Real Estate Commitments (Targeting a 7.5% Allocation)

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For OSERS to maintain a strategic allocation to real estate of 7.5% with a target Core/Non-Core allocation of 70%/30%, we forecast the Plan will need to make the following commitments: − 2021: $20 million Core − 2022: $20 million Non-Core − 2023: $20 million Non-Core − 2026: $10 million Core, $15 million Non-Core

Based on Q3 2017 Portfolio NAVs

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OSERS New Private Equity Commitments – (Targeting a 5% Allocation)

0%

2%

4%

6%

8%

10%

12%

14%

Current 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027




Capital Called - Existing Commitments (3.9) (10.7) (4.8) (3.2) (1.7) (1.1) (0.5) (0.2) Capital Called - New Commitments 0.0 0.0 0.0 (2.0) (5.3) (8.8) (11.4) (13.4)



Appreciation - Existing Commitments 4.7 18.3 17.5 14.8 11.5 9.0 6.7 4.8 Appreciation - New Commitments 0.0 0.0 0.0 (0.1) (0.1) 0.5 2.0 4.0

Private Equity NAV @ End of Year $141.6 $130.7 $115.1 $101.6 $90.9 $83.8 $80.4 $80.0 Private Equity as % of Total Program (1) 11.2% 10.0% 8.5% 7.3% 6.3% 5.6% 5.2% 5.1%



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NPERS DB/CBB Plan Real Estate Pacing

5.8%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Q3 2017 2017 2018 2019 2020 2021 2022Core Allocation Non-Core Allocation Target Policy Allocation 3.8% Total Program Growth Actual Net Asset Value

Forecast

$ in millionsInception to

Q3 2017 2017 2018 2019 2020 2021 2022Commitments 929 70 90 60 60 60 60 - Core 30 30 - - - - - Non-Core 40 60 60 60 60 60 Capital Calls (986) (167) (108) (62) (62) (52) (41)Distributions 593 76 29 48 55 70 75 Annual Net Cash Flows (393) (91) (79) (14) (7) 18 34 Real Estate NAV 800 923 1,071 1,165 1,259 1,334 1,398

Total Plan Value 13,871 14,003 14,535 15,087 15,661 16,256 16,873RE Value as a % of Total 5.8% 6.6% 7.4% 7.7% 8.0% 8.2% 8.3%

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NPERS DB/CBB Plan Private Equity Pacing


Year Investment2018 150.02019 150.02020 150.02021 150.02022 150.02023 150.0

0%1%2%3%4%5%6%7%

Current 2018 2019 2020 2021 2022 2023 2024




Capital Called - Existing Commitments (45.2) (124.9) (87.8) (60.6) (27.6) (16.9) (9.4) (5.3) Capital Called - New Commitments (16.7) (44.2) (73.7) (94.8) (111.6) (122.3) (127.6) (130.3)


Private Equity as % of Total Program (1) 4.7% 5.1% 5.4% 5.6% 5.6% 5.4% 5.2% 5.0%

osers transition plan update & planning the coordination ... · osers real estate pacing – no...

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