David Enriquez is a man with a lot on his plate. The straight-talking Floridian was hired by New York City’s Bureau of Asset Management in 2016 to build a private equity co-investment programme for the city’s five main public retirement systems.
Three years on and a plan for the programme is on the cusp of seeing daylight – a reflection of the preparation and research Enriquez and his team have conducted to ensure one of the US’s largest pension systems’ entry into direct investing is done right.
When Private Equity International sits down with Enriquez in the Intercontinental London Park Lane hotel in late September, the conversation doesn’t feel as spontaneous as it probably could. Enriquez does not typically grant interviews and his press relations team has requested a detailed list of our questions in advance. The pile of papers Enriquez keeps to one side with answers to our questions have no doubt been reviewed by his press minders. To his credit, he hardly refers to them.
Meeting Enriquez for coffee in a plush Mayfair hotel is also unusual for a different reason. As a public official, the 49-year-old takes the concept of anti-bribery extremely seriously – as no doubt he should. On a practical level this means even buying him a cup of coffee is problematic. Lunch is out of the question. We settle for one glass of tap water. Of course, any opportunity to sit down with the man who oversees the private equity allocations of New York City’s $208 billion public retirement systems is time well spent. Our conversation begins with a reference to his comments earlier this year when he told PEI on the sidelines of an industry conference that building a co-investment team was a top priority. How have these plans progressed?
“Co-investment is a strategic priority for the private equity portfolio,” Enriquez says emphatically. “Since we last met, we’ve continued to study the market opportunity and assess the potential investment approaches and structures that are available to limited partners. This ranges from executing a programme in-house, to outsourcing the programme. However, there is also an in-between approach where LPs work together with a partner.”
“It’s sort of a balancing act,” Enriquez says. “There are some challenges to trying to do it in-house with a dedicated team, because we don’t have that. We are a six-person private equity team where we’re doing fund investing and monitoring the portfolio.”Enriquez and his team have done this by meeting LPs who are active co-investors, GPs who actively syndicate co-investments and co-investment platforms with dedicated co-investment funds, to understand how they work with other public pension plans. Working with StepStone Group and Hamilton Lane, NYCRS’ two private equity consultants, he and his team have seen the various ways LPs approach co-investments and have decided to sit somewhere in the middle between an outsourced, passive approach and an in-house dedicated team that can co-underwrite a deal.
Enriquez’s plan is to present a proposal for an approach to a co-investment strategy to NYCRS’ boards of trustees at some point in 2020. This would cover the proposed size of the programme, investment guidelines, and strategy and geographic focus. Though he declines to go into specifics, Enriquez hints NYCRS will most likely aim for a more active approach.
“There are strategic benefits to co-investing that are more easily achieved if, as an LP, you have somewhat of a more active role than just fully outsourcing it,” he says. “We’re still trying to figure out where on that spectrum we’ll be, but it’s potentially somewhere in the middle.”
Building out the bench
New York City Retirement Systems – the unofficial term given to the group that comprises public pension systems for the city’s teachers, employees, police, fire and board of education – appears now to have the team to implement its plans. In September, PEI reported the pension system had expanded its private equity unit with the hire of two veteran limited partners as senior investment officers: Katja Salovaara, who spent almost two decades at Finnish pension fund Ilmarinen and helped build its private equity exposure up to almost €4 billion, and Cristian Norambuena, who spent six years at Chile’s AFP Capital, most recently leading strategy and alternative investments there. The two additions mean NYCRS’ PE team is now fully staffed, Enriquez says in a follow-up interview in October.
“There are strategic benefits to co-investing that are more easily achieved if, as an LP, you have somewhat of a more active role than just fully outsourcing it. We’re still trying to figure out where on that spectrum we’ll be, but it’s potentially somewhere in the middle”
“They’re very senior members of the team – that’s not lost on me. That will allow us to be more efficient and pursue and execute on some of our existing strategic programmes like the 2019 emerging manager programme, and finalising our work and proposal on a co-investment strategy for the boards of trustees, while all at the same time working on our day-to-day fund investments and monitoring the existing portfolio.”
With $13.2 billion of private equity exposure across its five pension systems, accounting for 6.3 percent of total assets, it’s important that private equity delivers. Whether it has is another question. For Teachers’ Retirement System and New York City Employees’, the two largest pension funds, private equity underperformed its public benchmark, the Russell 3000, in the 10-years to June. The asset class delivered returns of around 13 percent for both pensions, compared with 19.77 percent from the benchmark (which includes a 300 basis point illiquidity premium), according to performance reports published in September.
One challenge the pension system faces is it has been banned from interacting with placement agents due to the pay-to-play scandal a decade ago involving New York state comptroller Alan Hevesi and the New York State Common Retirement Fund.
While NYCRS was not involved in the scandal, the repercussions of the event affect the way it operates. One placement agent PEI spoke to says while Enriquez and his team run a “tremendous” programme, the pension is at a disadvantage because its restrictions are so tight, and dealflow is limited to re-ups and opportunities it receives via its two consultants.
“We can’t even send them Christmas cards,” the placement agent adds.
NYCRS’ existing relationships with its GPs appears convivial. One US-based manager praised the pension for its long-term mindset and thorough approach to due diligence.
“They have an open-door policy and are transparent in their processes,” says the GP. “They don’t slow us down and are pretty prompt with their requests and answers … they are very collaborative on the limited partner advisory committees and ask a long list of reasonable questions.”
Compared with other LPs, NYCRS is “very open”, the GP adds.
Other market sources say NYCRS’ structure – five pension systems each with their own agenda – makes it cumbersome for potential GPs to navigate. Its private equity consultants add yet another layer of diligence for potential managers to go through. Both Hamilton Lane and StepStone declined to comment for this article.
But once a GP is in, we hear NYCRS is a loyal LP. “They are very user friendly and don’t make life miserable for GPs when they make a request as an LPAC member,” says a New York-based placement agent whose clients have raised capital from NYCRS.
How NYCRS works
Recommended fund commitments are typically split pro rata between the five pensions based on their private equity AUM.
The core of the private equity programme still revolves around buyouts, accounting for about 63 percent of the $4.7 billion private equity portfolio of NYCERS, the system’s second-largest pension as of March, according to a report by StepStone.
While the pension invests $2.5 billion-$3 billion in private equity each year, it has what Enriquez calls “white space” in its portfolio – mid-market exposure in Europe and North America: “It’s a part of our portfolio where we need more exposure and more investment. We made a commitment to a US mid-market manager in 2019 and we’re also currently doing work around the opportunity set in Europe.”
Tips on becoming a NYCRS GP? Be a top performer – preferably delivering at least a mid-teen net IRR. Attend ILPA’s annual General Partner Summit in New York, get your name in Hamilton Lane’s or StepStone’s good books, and if you’re a European manager, try to catch Enriquez when he’s in London for AGMs. After that it’s about transparency, governance and how the GP handles its relationships with LPs.
Shaping best practices
As one of the US’s largest pension managers, NYCRS yields the power to influence and shape best practices in the industry, although Enriquez doesn’t admit it: “I’ve never had a sense that other plans are looking to the larger plans for guidance since we are each independent institutional investors.”
Enriquez views NYCRS’ role on LPACs as shaping both GP and LP behaviour. The pension is on the LPAC of every fund it has backed over at least the last three years, something Enriquez says is important because it gives NYCRS a voice over governance matters and conflicts of interest in transactions.
His advice to fellow LPs is straightforward: prepare in advance of a meeting and engage in the discussion. Ensuring the same individual is attending LPAC meetings so that person can develop an institutional knowledge of the fund, the GP and its portfolio companies is also crucial. This will help the committee work more cohesively as the individuals can build working relationships together.
“If you’re inconsistent, if there’s a different person at each meeting, it’s really hard to have a point of view and continuity and understanding the evolution of the fund or how [the GP is] progressing or not progressing on a particular investment,” he says. “It is really important to evaluate the materials, read the materials, speak to your consultants and have a point of view.”
Unsurprisingly, Enriquez’s advice for GPs is similar to the guidance outlined in the Institutional Limited Partners Association’s principles: provide sufficient advance notice to LPs with plenty of materials and disclosure.
“You need to bake in a certain amount of time to allow the investment staff to have discussions internally and with their consultants and evaluate the proposed transaction and form a point of view,” he says.
Four weeks’ advance notice is ideal; 48 hours’ notice is not so helpful, he adds.
“Myself having been a banker, it’s not like a deal materialises 72 hours before you need an approval from an LP advisory board. It’s been in diligence, negotiated over a period of time – negotiated on price, negotiated on terms. The GP has an element of visibility. I don’t think it’s asking too much to provide three weeks or so to allow the advisory board to fully understand the situation.”
Enriquez cites an example involving a conflict transaction where a GP was selling an asset from one fund and then co-investing in the same asset from another fund. The manager had two separate deal teams with separate financial advisors who rendered two separate fairness opinions, in addition to separate law firms for the respective deal teams. On top of that, the GP hired a law firm to oversee the integrity of the process and ensure information flows were going in the right direction.
The process was robust and the GP even offered LPAC members a conference call with the investment bankers and financial advisors for an “in-camera” session without the GP.
“That was probably one of the best run situations that we’ve seen,” Enriquez says, adding that the LPAC ultimately approved the process. “That’s something GPs should consider: maintaining the independence of the process, providing disclosure to the advisory boards. At the end of the day, it’s the advisory board who has to vote yes or no on the conflict transaction.”
When we speak, the UK is still embroiled in Brexit negotiations and the US House of Representatives has just launched an impeachment inquiry into President Trump. Does the head of private equity at the US’s fourth-largest pension system see any red flags for the industry in the next 12 months?
“Absent any exogenous, economic or geopolitical shock to the system, I don’t see any changes,” Enriquez says.
“It could be the nature of private equity as a private asset class, in comparison to public markets where there’s always some element of lag in terms of reacting to an economic or political situation. But as I look at our forward calendar of strategic initiatives and potential fund commitments, I am expecting it to be somewhat the same as the last 12 months.
Enriquez’s conviction in the industry’s ability to weather storms is impressive – but then it has to be if you’re on the hunt for private equity partners to help you build your co-investment programme. “That said, given the length of the economic expansion, I expect that a recession is likely in the investment period of the 2020-vintage funds so this is something we think about as we construct our portfolio.”
Enriquez is also in a unique position, located in a global centre for private equity. At 1 Centre Street in downtown Manhattan, Enriquez and his team are a subway ride away from the headquarters of many of the managers NYCRS is invested in – something that makes attending AGMs more efficient, he admits.
“Being in New York City certainly has its advantages as a limited partner. Many of our GPs are either headquartered here or have an office, so having ready access to them for update meetings allows us to be more efficient in monitoring the portfolio and reduces the travel burden for our team.”
The next generation
NYCRS has been a long-time supporter of emerging managers via various fund of funds platforms and on an ad hoc basis. Since 2012 the pension has been running a direct emerging managers programme that commits between $25 million and $75 million to US or European GPs who are raising less than $1 billion. The programme received a $600 million reauthorisation in March – a 20 percent increase on its 2015 allocation – and represents how bullish NYCRS is on the opportunity set, Enriquez says.
“My point of view on emerging managers is that it’s almost a bit of the market opportunity that the structure of the private equity industry creates,” he says.
“When you have a 10-year limited partnership structure with a carry point compensation system, and you combine that with human nature, there will be GPs who successfully have a generational transition, but there will be many who don’t. It’s really that dynamic which will create this almost perpetual dealflow or opportunity set of young, talented investors who will strike out on their own.”
“I expect that a recession is likely in the investment period of the 2020-vintage funds so this is something we think about as we construct our portfolio”
NYCRS has so far backed 15 emerging managers via its direct emerging manager programme, two in the last 12 months and is set to back a third before the year is out, Enriquez says. Performance has delivered mid-teen internal rates of return, consistent with the PE programme’s underwriting requirements, he adds.
The pension’s board also approved a $1.5 billion programme to invest in early stage and first-time private markets fund managers – something that underscores NYCRS’ commitment and conviction in this area, Enriquez says in the follow-up interview.
Enriquez also hints NYCRS may be looking for managers with a differentiated strategy to complement the pension’s portfolio in the event of a downturn.
“We are, at least speaking from a US perspective, in the longest historical economic expansion to date. Any fund that’s fundraising in 2020, I would expect an economic inflection point during their investment period, so we’re thinking about what strategies make the most sense in terms of what fits in our portfolio and factoring in where we are in the cycle,” he says.
We discuss which strategies NYCRS doesn’t commit to (venture, impact, renewables or emerging markets) as well as niche strategies it does, such as secondaries. Secondaries giant Ardian is the pension’s third-largest private equity GP by exposure, and both TRS and Employees’ have committed to the firm’s latest ASF VIII programme, including a co-investment vehicle.
At the British Private Equity & Venture Capital Association Summit 12 months earlier, Enriquez had said the 10-year limited partnership model is here to stay. Does he still believe this?
“I do, but at the BVCA conference they were asking for bold predictions for the future, and I was a little bit tongue-in-cheek,” he says smiling.
“To me it’s such an obvious point. I was half-joking but I do believe it is here to stay, and I think the industry will continue to innovate around it. For some reason it’s been so enduring. Today I could say it without my tongue in my cheek.”