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Callan advises smaller plans to favor fund‑of‑funds and explains governance, fee and liquidity tradeoffs
Summary
Callan consultants briefed Mendocino trustees on private equity and private credit, explaining three implementation models — fund‑of‑funds, direct programs and hybrids — and recommended fund‑of‑funds for smaller plans while highlighting long lockups, manager selection risk and administrative burdens of direct investing.
Callan consultants delivered an educational briefing on private equity and private credit at the Mendocino County Board of Retirement meeting on July 15.
Ashley Khan, head of private equity research in Callan’s alternatives practice, said private markets can offer higher expected returns but come with greater complexity and illiquidity. "Private equity and private credit are private unlisted investments…they do provide some diversification," she said, then noted a wide dispersion of manager returns and the importance of manager selection.
Callan outlined three primary implementation models: a fund‑of‑funds (a turnkey, highly diversified single line item but with an extra fee layer); a direct program (more control and potentially higher net‑of‑fee returns but more operational complexity); and a hybrid or core‑satellite approach. The consultants told trustees a smaller plan often starts with a fund‑of‑funds because it reduces dispersion risk and the operational burden of managing many closed‑end fund commitments.
Consultants emphasized governance and staffing questions: direct programs typically require dedicated investment staff or specialist consultants to underwrite, manage capital calls and handle legal, tax and reporting work. Callan also noted private credit offers more flexible open‑end structures than private equity, which typically uses closed‑end partnerships with capital calls and multi‑year lockups.
Trustees asked about peers, secondary market liquidity and regulatory disclosure. Callan acknowledged data lags in private markets reporting (quarterly or longer) and the risk that changes in allocation could trigger secondary market sales at a discount.
No decision was required; trustees said they appreciated the overview and asked staff to include private markets options in the upcoming asset‑liability study and future educational sessions in October (private equity) and December (private credit).
