Steven Hart, the chairman of the Investment Advisory Council (IAC) of the Connecticut State Treasury, sees private equity from an institutional as well as individual perspective. Appointed to his position four years ago by then-governor John Rowland, Hart and his committee advise on investments for the $18bn fund, presided over by the current state treasurer, Denise Nappier. We caught up with him near the end of his first term and asked what he learned about private equity while in the service of a very public organisation.
What role does Connecticut's IAC play with regard to private equity investments?
The IAC is not a board of trustees. We have the responsibility for approving the asset allocation policy of the treasurer, the sole fiduciary. We also approve manager selection and other service provider selections. We approved the state of Connecticut's 11 per cent allocation to private equity; we are involved in interviewing managers. In the event that the IAC votes against any managers, the treasurer can still go ahead and appoint them, but there's a process she has to go through.
Have you ever been against a treasurer's manager selection?
We went to the governor in one case, and that was when Treasurer Burnham went to work for a value equity manager which had a tie to one of our managers, and we felt that manager should resign. And that manager did resign.
Do you like private equity? Is it an appropriate investment for a state pension?
I do like it. I think it provides diversification. I think it has historically provided good returns for the state pension. There are some problems with it, however, like there are with any other asset class. The alignment of interests between the manager and the LP is something that you have to carefully monitor. Finding good managers is a challenge. In private equity, unlike the public side, it's a lot more difficult to exit managers who you're no longer comfortable with. The secondary market helps some, but there is a very significant transaction cost. So in the private equity area, there is a liquidity issue, but traditionally we're compensated for that with higher returns.
What changes could occur in private equity that would make it easier for institutional investors to embrace the asset class?
The ability to get in and out more easily. Improved liquidity. A greater ability to change managers to the extent that a manager strays from the investment focus. Another change would be greater transparency; being better able to know what the general partners are doing. This may be more of a concern to a state pension than to an endowment or a family office. We really need to know what we're investing in because of the statutory requirements that we abide by. Greater transparency is an area where GPs have resisted reform. But it would be helpful in terms of our willingness to invest in the asset class. Although, at an 11 per cent allocation, we're double where most state pensions are.
Since 1998, your state's treasury office has been dealing with the aftermath of a bribery scandal perpetrated by a former treasurer, Paul Silvester. What do you feel has been overlooked in all the attention this case has drawn?
When I joined the Investment Advisory Council, the state of Connecticut was one of the worst-performing public pension funds in the country. We are now in the top quartile. I don't think people remember that. Furthermore, Connecticut used to be a pay-to-play state. There was a substantial number of money managers who had made contributions to the campaigns of previous treasurers. Managers were picked for reasons other than their investment track record and propensity for good returns going forward. We passed a law that prohibits anyone from giving money to the treasurer and then doing business with the treasurer's office. We very much professionalised the way the state's pension is run and we squeezed out a lot of corruption to the point where we actually caught someone doing something wrong and he's in jail right now.
Your pension is currently suing private equity firm Forstmann Little for breach of fiduciary duty. What are your goals with this lawsuit?
Connecticut used to have a laissez-faire attitude to corporate governance. That has changed. In the case of Enron and various other areas, we found that the boards of directors were, in fact, not operating in the best interests of the shareholders. Connecticut has now become very active in corporate governance.
The Forstmann Little suit should be seen in the context of us enforcing better governance. In their case, the question is, did they follow the agreement that they had with us? Connecticut has lost money, like all other private equity investors, in the last few years. But we're not suing because we lost money. Where we feel that our agreements have been breached by our managers, we will pursue remedies. On the public side, we introduced 43 resolutions this past proxy season on a whole host of issues.