The $164 billion Florida State Board of Administration did not add any new managers to its private equity programme in fiscal 2018, even as it re-upped almost $2 billion across 20 funds. Yet the pension system reviewed almost 150 new managers, of which 11 graduated to the due diligence stage, only to fall in later stages.
“The GPs we looked at were really good performers, good teams, but at the end of the day, we thought they duplicated exposures [and] strategies we already had in the portfolio,” senior investment officer for private equity John Bradley told the board at the 18 June meeting, according to recently released pension documents.
SBA can decline to commit to a fund at any of the four stages of its process, which includes initial screening, full diligence, legal negotiations and final close.
“Each investment or fund commitment should be able to survive the analytical rigor and the scrutiny of our entire team numerous times before we commit,” Bradley said.
For instance, one of the funds SBA reviewed generated a net internal rate of return of 13.8 percent – an above median performance when compared with the pension system’s Cambridge global PE and VC benchmarks. Yet at the US buyouts strategy level, the fund’s IRR and total value-to-paid-in ratio were below median, senior portfolio manager Wes Bradle told the board. “So even though this firm had strong absolute performance, we ultimately decided to pass on the next fund, in part because of the relative performance,” he said.
Most funds are declined at the initial screening in which the team reviews fund strategy and how it might fit into the portfolio, he added.
The team meets with the GP at the SBA office at the full diligence stage and drills down into the specific terms of the fund. A team member drafts a two-to-three-page preliminary diligence summary and continues to populate the document with more data.
At this stage, SBA declines funds if it finds, for instance, that 90 percent of the fund is driven by technology, Bradley explained. SBA already has a 42 percent exposure to that sector, Private Equity International has reported.
The due diligence process includes the Institutional Limited Partners Association questionnaire that has over 112 questions on fund strategy, investment process, reporting and administration. It also has a quantitative data request with 71 data points on each company in the previous funds.
“It [due diligence] provides a lot of data points to see kind of where a fund is investing,” Bradle said at the meeting. “It allows us to test hypotheses and form conclusions…that the fund being considered is expected to fill.”
During due diligence, SBA conducts on-site visits and makes reference calls. Its consultant Cambridge Associates also presents a consultant memo on the fund.
If the team still thinks it is worth pursuing the private equity fund, it sends the investment approval memo to chief investment officer Ash Williams and deputy chief investment officer Kent Perez to review and sign off. Finally, the legal terms are discussed with both internal and external fund counsel to assess alignment and negotiate terms, Bradle said.
The SBA team also holds twice yearly full day strategy sessions with Cambridge to review the landscape to understand “where should we be spending our time, what type of GP, what type of fund, what type of strategy do we think is best equipped to capitalise on this market environment”, Bradley said.
“We collect and analyse more information and discuss and debate again and do the same thing over and over – kind of rinse and repeat until we feel comfortable making a decision.”