Florida SBA mulls direct investing in private equity

The Tallahassee-based pension administrator discussed the possibility of making direct private equity investments, but concluded that it would struggle to build the necessary in-house resource.  

The Florida State Board of Administration (SBA) has been discussing the possibility of investing directly in private equity, according to the minutes from the Tallahassee-based pension administrator’s 5 December meeting.

Since the meeting, the SBA has decided not to pursue direct investing, according to its spokesman.

However, at the December meeting, there was a robust dialogue about the possibility of launching direct investment capacity.

The SBA chief investment officer Ash Williams said direct investing would be done through the Florida Growth Fund platform, which is managed by its investment advisor Hamilton Lane, launched in 2009 to make private equity and credit fund commitments and co-investments in tech and growth sectors in Florida. SBA’s private equity programme launched in 1989.

“At the last meeting, I think it was the consensus of all of us, but maybe a little bit disagreed by staff, that in the Florida Growth Fund, we should consider making direct investments,” Chuck Cobb, a member of the SBA’s investment advisory council said at the December meeting. “And the answer was that we weren’t staffed up for it.”

The SBA currently does co-investments through the FGF, which Williams said was one means of mitigating investment costs, without the direct programme in place. Because the FGF has a robust co-investment programme, it would be the platform through which SBA does direct investing, if implemented, he commented.

The SBA spokesman confirmed with Private Equity International the organisation has never done direct investing in private equity.

FGF I launched in 2009 and has deployed $403 million to 20 fund commitments, 25 equity co-investments and five credit co-investments since then, according to a presentation by Hamilton Lane at the 19 September meeting. FGF I was generating a net internal rate of return of 11.3 percent as of 31 March, according to the presentation.

Its successor, FGF II, launched in December 2014 with a $250 million allocation from SBA. It has invested $52 million in four fund commitments and three co-investments, some of which were re-ups to existing managers from FGF I, the presentation showed.

The resources that would be required to amplify its direct investing capabilities were a cause for concern for many during the December meeting. Williams said most direct investments done by pensions are in Canada, where the public pension institutions have structural differences from those in the US.

“[There] is a relatively high number of staff people with incomes into the seven figures,” Williams said, referring to the Canadian counterparts. “So I’d say the likelihood of us being able to take on direct underwriting, entry value-add and exit of private equity investments in-house, is not great.”

He pointed to the fact that, while there are no directs being done at SBA, FGF’s co-investments do help in reducing fees associated with private equity. But he added that even the co-investments are done by Hamilton Lane, not in-house at SBA.

Another member of the council, Vinny Olmstead, raised concern over potential harm to existing general partner relationships.

“Perhaps you can get creative and take three great guys out of one fund and start a new fund and play along those lines, but I think hiring and getting a staff here that could compete in the private equity or the venture world is a really tough hurdle to get into,” Olmstead said. “Then you ostracise some of your partnerships, which may be a dilemma, also.”

The SBA spokesman said the investment advisory council will likely not revisit the direct investing topic at the 6 March meeting but did not have further information on it going forward.

SBA, which has a target allocation to private equity of 6 percent, had allocated 6.6 percent to the asset class out of its $144 billion assets under management as of 31 December, according to the material for its upcoming 6 March meeting.

Hamilton Lane was not available to comment.