Ex-Washington treasurer: don’t focus just on mega funds

The former chairman of the $112bn Washington State Investment Board, who is now advising lower mid-market firm Star Mountain, says LPs should focus on diversifying their GP relationships.

As Washington state treasurer between 2009 and 2017, James McIntire – who also chaired the $112 billion Washington State Investment Board, which has $21.1 billion in private equity – oversaw 17 retirement funds, five state insurance funds and 13 permanent and other trust funds.

He now brings his LP experience to the general partner side to work on lower mid-market firm Star Mountain Capital’s investor base as a senior advisor, helping with strategy, generating investment ideas and making LP introductions. He joins 17 other senior advisors at the firm, including John Mack, former chairman and chief executive officer at Morgan Stanley. He will be advising the lower mid-market firm from afar, remaining in Seattle, he said in a conversation with Private Equity International.

Why did you decide to leave your position as an LP to join Star Mountain?  

I had been looking for an opportunity to stay involved and stay active. I met [Star Mountain founder and managing partner] Brett Hickey at a conference last year, and liked what he was doing with his firm. I eventually agreed to help them sort through and gain better access to the institutional investor market, particularly pension funds.

I liked their model, their approach to providing a range of options and services to small businesses looking to grow and expand; I think there’s a lot of juice in that part of the market. They developed a strategy very much focused on the small end of the mid-market and I think their interest is to grow a programme that’s much more easily attractive to institutional investors.

What were some challenges you faced at the WSIB? 

I came to the Washington Treasury in January 2009, which was not a restful time to come in as treasurer. We were seeing assets fall, like any other institutional investor at the time. The Washington Treasury shrank from $6 billion to $2 billion in six months.

For the investment board, the circumstances caused us to do a bit of reflection and spend time thinking about how we had been investing in private equity up to that point and how we managed our allocation. At that time, we had a 25 percent target allocation to private equity. We did drop our target allocation a little bit to 23 percent. We dropped our benchmark a little bit to make sure we weren’t overreaching. But private equity continues to be a terrific performer for Washington state.

Several public pension funds are concentrating their private equity exposure to a smaller number of GPs. Why hasn’t the WSIB applied a similar approach to the asset class? 

The board sees the development of GP relationships as long-term. To not have all your eggs in one basket, but to spread it around and have several major relationships. In private equity, you have managers who have the capacity to manage their way through difficult times, and to make money during the difficult times. It creates a very different asset class and a useful diversification.

One of the reasons for culling relationships is to cut costs associated with private equity. Is that a concern to the WSIB? 

The reality is we’ve always looked at returns of private equity on a net basis and, as long as the net returns are adequately compensating for risk, I think the board feels reasonably comfortable with the current fee model. Of course they would always prefer better terms, but a long-term net return of 13 percent is pretty good.

LPs need to understand that the more money the GP makes in carry, the more money LPs are making on our investment. Some of the public dialogue around fees and costs for private equity investments needs to be put in perspective.

Now that you’ve crossed over to the GP world, what is your advice to LPs? 

If you are starting out and have an investment fund with a fairly small allocation to private equity, you have an opportunity to find a variety of different types of funds. You shouldn’t spend all the time trying to get into the mega funds. The opportunity there is to look at developing your portfolio and understanding relationships. I think that’s a piece [of it] a lot of folks who haven’t been in the business for a long time at the smaller end don’t always appreciate: it takes time to build up the private equity allocation and build those relationships.

McIntire, the 22nd treasurer of Washington state and former chairman of the Washington State Investment Board, left his two-term post this month to advise New York-based lower mid-market firm Star Mountain Capital, which manages $490 million in assets and focuses on companies with between $10 million and $150 million in annual revenues.