CIOs of large public systems explain how new managers can get their money

Large public pensions are always on the lookout for new talent and smaller managers, and the CIOs of four large pension systems recently shared advice to firms looking to break in.

The CIOs of the $151 billion Florida State Board of Administration, the $150 billion Teacher Retirement System of Texas, the $120 billion New York State Teachers’ Retirement System, and $28 billion Texas Employees’ Retirement System discussed their approaches to finding new managers at Texas Teachers’ annual emerging manager conference on February 7.

While each pension fund had its own policies, some common themes that emerged included the importance of specialization, the need for patience, and a sharp focus on returns.

All four CIOs said emerging managers need to punch above their weight if they’re going to catch a pension fund’s attention.

“It’s well-established in the academic literature that small or newer managers, for whatever reason – hunger, motivation – tend to produce some pretty persistent alpha over the years,” Florida SBA’s Ash Williams said.

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Blackstone to focus on ‘unloved’ large side of the market

Blackstone Group’s private equity head, speaking at a recent Oregon pension meeting, said the frenzy for middle-market private equity deals has made the larger end of the market relatively more attractive than ever.

While many LPs are skeptical of megafunds’ ability to continue to provide top-tier returns, Blackstone’s Joseph Baratta said many “unloved” large companies or overlooked divisions of companies are good bets for the type of operational improvements that only a firm like Blackstone can provide.

“We think that the large end of the market is relatively more attractive today than it has ever been,” Baratta said.

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Commonfund sees value in overlooked secondary niches

While many investors are frustrated with high prices on secondary private equity assets, Commonfund still sees value in overlooked corners of the market.

The market for secondary transactions, which Evercore recently reported grew a third to $72 billion in 2018 from $54 billion in 2017, is playing an increasingly important role in investors’ PE strategies. Commonfund, which manages $24.1 billion in endowment and foundation assets, tries to stay a step ahead by looking for opportunities in venture capital, emerging markets, and other areas where competition is less heated and prices are lower.

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Trump administration knocked over long delays in SBIC licensing

The government’s small business investment company program is losing some of its luster among managers as long licensing times and the recent government shutdown hamper LPs’ ability to reliably deploy capital to government-backed small-business funds.

GPs and LPs alike complained to Buyouts about long wait times for SBIC licenses – and that was before the government shutdown worsened the backlog at the U.S. Small Business Administration. Most say SBICs still offer attractive opportunities for investment, but many are concerned that the program is trending in the wrong direction.

Unexpected slowdowns

Attorney Mark Kromkowski, head of McGuireWoods’ SBIC Fund Formation and Transactional Group, said approvals that used to take six months now commonly take a year or more. While some delay should be expected whenever a presidential election leads to turnover of key SBA staffers, the transition between the Obama administration and the Trump administration had unexpected slowdowns, especially for a program that is popular with both Republicans and Democrats, Kromkowski said.

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