LP Reflections

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As the National Association of Investment Companies celebrates its 40th Annual Meeting and Convention, the Journal of EDM Finance took the opportunity to solicit thoughts from some of the leaders in the LP universe about private equity investment in the EDM and the role NAIC has played over the years.

New York Common Retirement Fund

Our first Q&A was with New York State Comptroller Thomas P. DiNapoli and the Emerging Managers Program team at the New York Common Retirement Fund (NY Common). We asked about New York Common’s relationship with NAIC and the emerging domestic market.

Journal of EDM Finance: This year, NAIC celebrates its 40th anniversary. How, in your opinion, has NAIC influenced the way NY Common views and invests in the emerging domestic market (EDM)?

NY Common: The NAIC’s tireless advocacy has not only influenced the way that the CRF views the EDM market, but the way that the entire institutional market views the space. Prior to the founding of the NAIC, there were no organizations in a position to broadly articulate the collective story of the potential alpha generation that can be found by institutional investors who were willing to consider investing in the EDM space. NAIC has consistently and effectively told that story.

EDM Journal: Over the years, how have NAIC programs and research helped to expand your investment team’s awareness of and relationships with emerging managers?

NY Common: The success of our emerging manager program is widely predicated on our ability to evaluate the entire pool of emerging managers. Our ability to identify those in the pool and capture the overall trends in the marketplace is greatly helped by the work of NAIC. We are regular attendees at their conferences and conventions, and view their reports as mandatory reading for those truly interested in understanding this marketplace.

EDM Journal: Have these programs and relationships influences investment decisions and/or policies at your fund?

NY Common: We have a longstanding commitment to the EDM space, and the work of NAIC has reinforced and propelled that commitment. In fact, many of the investment relationships we have with emerging managers grew out of relationships cultivated during NAIC-sponsored events.

EDM Journal: As an institutional investor, what would you say is the most valuable contribution NAIC has made to the filed of private equity investment over the past 40 years?

NY Common: NAIC’s most valuable contribution has been its ability to consistently advocate for, and to empirically prove from a returns standpoint, the value of EDMs to the institutional investor, and why their continued growth is paramount to the overall health of the pension industry.

EDM Journal: People of color and women are among the newest participants in the financial management profession, especially when it comes to alternative investments. To date, they still constitute a fairly small percentage of professionals engaged in this endeavor. How valuable do you believe emerging managers are to the long-term health and expansion of the private equity and alternative investments field, and what can institutional investors do to facilitate emerging managers becoming more status quo than anomalous?

NY Common: Opening up opportunities to women and people of color to invest the assets of the CRF has been one of the top priorities of [the New York State Comptroller’s Office]. We have a firm belief that by expanding the pool of asset managers, we expand the CRF’s ability to generate high returns. Women and minority managers offer a unique opportunity to generate returns and diversity our portfolio because they often invest in places that our larger partners do not, and are often able to use their size to be more nimble, and therefore more effective investors.

EDM Journal: Is there any advice you would offer to other institutional investors and others about how best to use the resources of the NAIC?

NY Common: We’d encourage other plan sponsors to lean on NAIC as a resource in identifying the next generation of emerging managers. NAIC has been an invaluable partner in this effort. Plan sponsors across the country would benefit from their knowledge of the history, challenges and solutions in this space.

The California State Teachers’ Retirement System and the EDM

The California State Teachers’ Retirement System (CalSTRS) is one of the largest public pension funds in the nation. Together with its sister institution, The California Public Employees’ Retirement System (CalPERS), CalSTRS has been a leader in working with emerging managers and has adopted a goal of investing 2 percent of its multi-billion dollar portfolio to the EDM.

NAIC solicited thoughts from the office of Cal- STRS’ chief investment officer , Christopher J. Ailman, about the Funds’ investment relationship with the emerging domestic market.

Journal of EDM Finance: How has the NAIC influenced the way your fund invests private equity in general, and, more specifically, in the emerging domestic market?

CalSTRS: CalSTRS sends its heartiest congratulations on this important anniversary. NAIC had a tremendous influence on the emerging domestic market space by promoting the development of successful private equity investment firms that are a reflection of the fabric of our country. NAIC is seen as the prime organization for private equity in the EDM space.

EDM Journal: California has been a leader in demonstrating how public retirement funds can enhance investment returns while making a significant contribution to the economic expansion of the EDM. To what extent have NAIC programs and research helped to inform CalSTRS investment policies and practices?

CalSTRS: The NAIC’s interactive discussions deliver valuable and timely perspectives about the investment environment in the EDM space, regulatory changes, and are ideal forums for plan sponsors to identify and interact with top-tier minorityor women-owned firms. This is consistent with the direction that the CalSTRS board has given through its core values, specifically the core value of: “Strength. We ensure the strength of our system by embracing a diversity of ideas and people”

Journal: To what extent has NAIC helped CalSTRS to expand its relationships with emerging managers?

CalSTRS: At this point, 37 percent of NAIC members (12 of 33 funds) are included in CalSTRS private equity Proactive portfolio. This is the largest concentration of emerging managers within our portfolio in any one organization.

EDM Journal: As an institutional investor, what would you say is the most valuable contribution NAIC has made to the field of private equity investment over the past 40 years?

CalSTRS: NAIC has promoted awareness of the EDM space on a national level. This has attracted the attention of institutional investors to the opportunities this space presents [with regard to] the untapped talent found with diverse managers. At the end of the day, most institutional investors are after a maximum return at the prudent level of risk. As this space matures and returns tell the story, hindsight will show [that] NAIC was ahead of its time in focusing in the EDM.

EDM Journal: People of color and women are among the newest participants in the financial management profession, especially when it comes to alternative investments. To date, they still constitute a fairly small percentage of professionals engaged in this endeavor. How valuable do you believe emerging managers are to the long-term health and expansion of the private equity and alternative investments field, and what can institutional investors do to facilitate emerging managers becoming more status quo than anomalous?

CalSTRS: CalSTRS Investments believes that people of color and women are very valuable to the longterm health and expansion of the private equity and alternative investments field because they are reflections of the changing demographics of this country that add vigor and strength. However, investing in the private equity space tends to favor the experienced and seasoned funds. Thus, those emerging funds — first-, second- and third-time institutional funds — will have to show their results before they are perceived more as status quo than as anomalous.

What can institutional investors do to facilitate this process? They can be open to new ideas and new ways of creating value. Also, institutional investors must not be presumptuous, and [must] be flexible enough to be educated in this area. Lastly, perhaps the [most important element] in facilitating the incorporation of emerging managers is patience. Institutional investors must have the patience to go through the entire investment cycle. Doing so provides a fair opportunity for the emerging manager, and permits the investment to mature enough to achieve the results needed to continue the relationship.

EDM Journal: Is there any advice you would offer to other institutional investors about how best to use the resource of the NAIC?

CalSTRS: CalSTRS would relate [that] our experience and involvement with NAIC has been very positive and successful. NAIC has a wealth of information and experience to share with those interested in the EDM space, both from the perspective of those raising a fund (EDM managers) and institutional investors wanting to create an EDM program.

EDM Journal: CalSTRS and NAIC have joined with NY Common to compile a valuable resource [consisting] of emerging manager program best practices. How important is NAIC’s role in this type of partnership? Do you envision more of these in the future?

CalSTRS: The leadership role in private equity EDM is very important. At this time of uneasiness in the country about placement agents, NAIC provides a wealth of information and training to emerging managers, particularly in the fundamentals of raising a fund.

NY City Comptroller’s Office

New York City Comptroller John C. Liu is a trustee for four of the city’s five public pension funds and serves as investment advisor to and custodian of all five funds. Together with Deputy Comptroller for Pensions Lawrence M. Schloss, Liu ensures that sound investments are made on behalf of the funds’ shareholders. We asked the New York City Comptroller’s office (NYCERS) about its investment relationship with the emerging domestic market and the role it sees NAIC playing in the private equity investments sector.

Journal of EDM Finance: Over the years, how has NAIC influenced the way NYCERS invests private equity in general, and, specifically, in the emerging domestic market?

NYCERS: The EDM is an important part of our portfolio. The boards of trustees across the New York City funds have made significant commitments to fund of funds managers whose mandates are to invest in emerging private equity firms. Many of these firms invest in companies that serve diverse marketplaces. Co-investment in many of these companies is also an important aspect of the mandate.

EDM Journal: Over the years, how have NAIC programs and research helped to expand the NYCERS’ awareness of and relationships with emerging managers?

NYCERS: To be successful in the emerging manager space, it is vital that plan sponsors and the emerging managers have the ability to communicate and interact. NAIC’s annual meeting and important reports provide an important framework for the development of these relationships.

EDM Journal: Have these programs and relationships informed decisions and/or policies at the NYCERS?

NYCERS: Yes, well-informed and educated trustees and staff allow plans to make sound investment decisions.

EDM Journal: People of color and women are among the newest participants in the financial management profession, especially when it comes to alternative investments. To date, they still constitute a fairly small percentage of professionals engaged in this endeavor. How valuable do you believe emerging managers are to the long-term health and expansion of the private equity and alternative investments field, and what can institutional investors do to expand the presence of emerging manager?

NYCERS: In this challenging market, finding quality general partners is key. Plan sponsors want to develop long-term, successful relationships with a diverse group of general partners. Having the capacity to identify opportunities across all markets and sectors allows plan sponsors to meet their objectives. As the emerging manager grows, we hope to grow with them.

EDM Journal: Is there any advice you would offer to other institutional investors and others about how best to use the resources of NAIC?

NYCERS: In an increasingly complex marketplace, it is important for institutional investors to avail themselves of opportunities to better understand the value proposition offered by investing with a diverse group of general partners and in the emerging domestic markets. The resources of NAIC are important tools.

EDM Journal: Looking ahead, what role do you see NAIC playing in the ongoing expansion and wealth generation of the EDM, and how does your fund hope to participate?

NYCERS: Expansion of the emerging domestic market presents a great opportunity for plan sponsors to earn a strong return on their investment. While attracted by the possibility of strong returns, trustees are also pleased by the ability to invest in communities where many of their members live and work. NAIC will play an important role in helping institutional investors to better understand the marketplace and, consequently, to develop a more well-diversified portfolio.


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