Kansas Law Opens Door for State Pension to Boost PE Exposure

Kansas Public Employees Retirement System can now invest more in private markets because of a new law that removes the limit on the pension’s investments.

In recent years, many LPs have had to make tough decisions because the denominator effect caused their allocations to private assets to reach or exceed their target ranges. Public pension plans that are limited by state law in how much they can invest in alternative assets experienced the negative effects of having too much money allocated to these investments.

Kansas has passed a new law that allows the $26.2 billion pension fund to invest more money in alternative assets. The fund can now invest up to 25 percent of its total fund, which is an increase from the previous limit of 15 percent. The system has shown its support for the law, with CIO Bruce Fink and executive director Alan Conroy testifying in favor.

Kansas PERS was greatly affected by the denominator effect and its legally required target. According to the previous state law, investment staff would have to reduce or completely stop making investments in alternative options if the allocations exceeded 15 percent. Kansas PERS Chief Investment Officer (CIO) Bruce Fink told the state legislature that the system has invested more than 14 percent in alternative investments in recent years.

In 2022, the system had to stop making new commitments to alternatives because it was close to reaching the 15 percent limit. The investment staff at that time were worried that the system would no longer be able to work with their preferred managers.

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In 2023, the system decreased its private equity pacing plan because it was approaching the limit set in previous years. Kansas allocates 11 percent of its total fund to alternative investments, with most of it going towards private equity. The system also invests in infrastructure through its “real return” bucket.

According to the system’s latest performance update, as of the end of 2023, 10.8 percent of its total fund was allocated to alternatives. This allocation was influenced by the strong growth in public equities during the last few months of the year. We don’t know if or when the system might choose to increase its alternative asset goal.

According to some state legislators, the pension did not fully achieve its goals in the legislative process. The original bill aimed to completely remove the alternative asset cap and give Kansas PERS’s board complete control over its asset allocation policy. This is a common practice in several other public pensions across the country.

According to state legislature records, this legislation was changed quickly to remove the board’s high level of control. Instead, they decided to initially increase the alternative asset cap to 20 percent. During further negotiations, the legislature agreed to a 25 percent cap on alternative assets.

“The State Senate wanted to be more cautious,” said a legislator who was part of the negotiations.

Finally, the legislation that limits alternative assets was combined with other legislation. This legislation also includes selling off public assets that have connections to specific countries and making changes to how beneficiaries are paid. The bill became law in Kansas without Governor Laura Kelly’s signature, which is allowed by the state’s process.

In 2023, the lawmakers in New York State decided to raise the limit on the types of investments that pension funds located in the state can make. New York City’s pension plans have used this rule to their advantage. They have now set all of their private equity targets at 10 percent.