A message from South Carolina's employee retirement money managers to Wall Street investment firms: We think we can do this better. And for less.
The South Carolina commission that oversees the $24 billion pool of state worker retirement money wants to invest some of that money in a government-owned company it would create itself -- and locate in Charleston -- instead of with major private investment firms.
That do-it-yourself approach prevails at major colleges and universities that often hire their own investment managers to grow endowment money. But the same strategy hasn't spilled over to public employee retirement fund management until now, making the S.C. Retirement System Investment Commission the first fund manager in the country to try the approach.
Hiring a team of private equity managers would allow the state fund to avoid paying expensive -- and often-criticized -- annual management fees to outside firms. Commission leaders are under serious pressure to cut costs with a retirement fund that's now $12 billion short.
"We think the savings for this are in the hundreds of millions of dollars" over 10 years, said commission Chief Investment Officer Robert Borden at a state Budget and Control Board meeting Wednesday.
Board members and top state leaders agreed to give the proposal more thought, but they asked for more analysis before moving forward.
"This may be the best thing since sliced bologna, but I don't know enough about it to give it a blessing," said Senate Finance Committee Chairman Hugh Leatherman, R-Florence.
It's unclear when the commission would reroute the money to the new private equity firm. Before board members moved Wednesday to oversee the retirement commission's plans, Borden said the proposal still had at least 18 months of work before it would be ready.
Once the firm is up and running, its managers could handle up to $8.7 billion of state employee retirement money.
Those private equity managers would draw less money than the industry standard for compensation, which typically is 2 percent of the annual value of the assets and 20 percent of the profits. An early proposal showed that reducing those management fees to 1 percent of assets and 15 percent of profits could save about $70 million a year, according to consulting firm Booz & Co.
The risk of investing money with lower-paid managers remains unclear.
"To some extent, you get what you pay for," said Rich Lynch, chief operating officer at the Pennsylvania-based Fiduciary360 LP, a firm that's provided training to more than 4,000 investment fiduciaries.
But as long as private equity managers are hired after a "rigorous and objective" search, Lynch said the investment returns don't differ greatly between a major Wall Street investment company, a boutique firm or an in-house staff of advisers.
Retirement system commission members voted last week to move forward in creating the government-owned private equity firm, but their actions hit a roadblock earlier this week as state leaders raised concerns about the proposal's seemingly hasty pace.
Two days before the commission vote, Gov. Mark Sanford wrote a letter pushing transparency in the wake of the "commission's rush approach."
Even the commission's own board members weren't comfortable with the proposal's speedy passage. State Treasurer Converse Chellis, one of the investment board's six commission members, said he wants the board, General Assembly and state employees to review the proposal before it moves forward.
Chellis and other leaders didn't disagree with the idea, but said "a decision of this magnitude can't be rushed."
"(We don't have) enough information to allocate money to a company that doesn't exist yet," Chellis spokesman Scott Malyerck said. "If it's a good idea now, it'll be a good idea in a few months."
Reach Katy Stech at 937-5549.