TCRS, the Tennessee Consolidated Retirement System, must cope with competing investors, as do other pension plans looking for strong returns.
Yet, at the end of FY2014, last June, TCRS had a net asset position of $42.9BN, up $5.3BN on the year, almost entirely the result of investment returns, rather than contributions, according to a TCRS report.
Founded in 1972, TCRS only waded into private equity after the move was authorized by State government in 2008 -- and VNC broke that news to the investment community. For all TCRS stories, click here.
When at the end of Calendar Year 2014 stories began to pop-up about Limited Partners having difficulty gaining slots in some of the most attractive private-equity funds -- many of which continue to reach very quickly their "hard cap" limits -- VNC decided to check-in with TCRS.
We submitted questions for Michael Brakebill, TCRS chief investment officer; and TCRS Private Equity Director Daniel Crews. TCRS responded by e-mail, via spokeswoman Shelli King.
Our questions are paraphrased below, and TCRS's complete responses are provided, in full.
1. Does TCRS face competition for participation in new funds?
TCRS regularly encounters access-constrained managers. Private equity and venture capital investors seek to invest in the managers with the best prospects. One characteristic of a great manager is that they do not raise more capital than they can invest well. So, many investors are seeking to partner with relatively fewer managers with limited capacity, which creates access issues. This is particularly true at a time when investors are allocating even more capital to private equity managers, but the private equity managers are currently distributing more back to investors than they are investing.
Recent op/eds have argued large institutional private equity investors, especially public pension funds, should demand concessions on investment terms and walk away if they do not get them. This is a misunderstanding of the market dynamic versus our mandate to invest on behalf of our client. An investor who follows that strategy will earn sub-optimal net returns. Why? Because the investment managers with the best prospects typically do not need to make concessions in order to attract sufficient investor capital.
2. How does competition affect TCRS's private-equity investment strategy?
Our private equity investment strategy accounts for competitive fundraising environments. We will occasionally compete for access to a highly desirable private equity or venture capital manager, and have a fairly good success rate. We also look for managers who are more strategic and selective in adding to their investor base because TCRS has characteristics that are very attractive to many investment managers. Finally, we work to identify managers with great prospects who are not well-known by the private equity and venture capital investor community.
[Asked for further comment on TCRS's 'attractive characteristics', TCRS responded:] TCRS is a well-funded system. Since 1972, the Legislature has fully funded TCRS based on the Actuarial Determined Contribution. Further, most of [TCRS] plan assets are invested in liquid securities, and we are strategically committed to private equity as a long-term asset class.
3. Is the hard-cap issue a major factor contributing in Mr. Brakebill having previously said TCRS is not likely to add a lot of new funds?
Capacity issues ultimately do not impact the number of private equity investment managers with whom we will invest. Our portfolio forecast models indicate that we will only need to make capital commitments to a few more managers in order to achieve an allocation of 5% of Plan Assets. If this allocation target increases or the value of the Fund changes materially, we will revisit our optimal number of managers.
4. Does any of this make it more likely that a Tennessee-based firm/fund will for the first time, be invited to participate in the TCRS private-equity program?
The current competitive fundraising environment in private equity and venture capital does not affect any decisions we will make with respect to prospective investment managers in Tennessee. We continue to speak with and evaluate managers across the state.
5. Some time back, Mr. Brakebill expressed some confidence that a TN firm would eventually earn a seat at the table. Are there one or more TN firms that are likely to get a commitment, this year?
At this time we do not have plans to invest with a Tennessee-based private equity or venture capital manager during the 2015 cycle. We will continue to evaluate in-state managers throughout the year, however. [END of exchange.]
Though VNC is aware that Tennessee firms maintain dialogue with TCRS, which maintains an "open-door" policy, the net of it seems to be that, while the State has demonstrated its ability to operate in the private-equity arena, prospects for an in-state fund manager to earn a place on the TCRS/PE team seem little changed since our 2008 report here. VNC