Running the alternatives division at a $437 billion (€297 billion) private retirement system requires many components, the most elusive and important of which may be time.

“This job is the most time-consuming, intensive job – even if you don't commit to a single fund,” says Sheryl Schwartz, head of alternative investments at the Teachers Insurance and Annuity Association -College Retirement Equities Fund (TIAA-CREF). “And it doesn't matter how many people you have on your team…it's just incredibly time-consuming.”

Schwartz and her 10-person staff are constantly in motion as they seek top-quartile returns for the system's 3.2 million participants, most of whom hail from the higher education, medical, cultural and research industries (see boxed item p. 46 for background on TIAA-CREF).

We're home in our pajamas making due diligence calls. That's a good time, from 9.30pm to 11pm, to do reference checking and things like that. It works out well

Sheryl Schwartz

They pour over documents and company financials, attend internal meetings, frequently travel for due diligence or marketing trips, network with general partners and stakeholders, attend advisory board and annual meetings, and, in some cases, spend entire nights on calls to other time zones.

Fortunately, Schwartz says, TIAACREF is flexible in terms of employee schedules and allowing them to work from home if they wish. “It's not so rigid like you have to punch a clock,” she says. “We all work a gazillion hours, but there's flexibility in how we can do it – that's how we cover every time zone.”

For example, Schwartz and another investment team member, both of whom research emerging markets commitments, regularly make late-night calls to Asia after putting their children to bed in New York.

“We're home in our pajamas making due diligence calls,” Schwartz laughs. “That's a good time, from 9.30pm to 11pm, to do reference checking and things like that. It works out well.”

Schwartz was asked to launch TIAA-CREF's alternative investment division in 1997. “The decision to start it was initially just an experiment,” she recalls.

At the time, Schwartz was working in the retirement system's asset-backed securities division, and in the preceding nine years had worked in its various investment divisions including mortgage-backed securities, private placements and secondary private placements. She and five others, all of whom already held full-time roles in TIAA-CREF fixed income divisions, essentially volunteered to start the alternatives programme on top of their existing responsibilities.

“Well, I was the only one who was told to volunteer,” Schwartz chuckles.

The six of them began meeting with general partners, discussing strategy, screening funds, picking fund managers and making recommendations for commitments, which at the time had to be approved by a separate committee. That first year, the group made commitments totaling $347 million.

In order to help develop its approach, the group – much like it does today – conducted mountains of research, meeting with GPs, LPs, brokers, investment bankers and others.

“The key, we realised, was access to the best funds,” Schwartz recalls. “But with private equity funds, the best deals don't have a placement agent. You have to find them, identify them, and go out and network with them.”

After roughly a year, the group ceased operating on a parttime/volunteer basis.

“We needed a dedicated effort and a dedicated team. And we couldn't just respond to opportunities, we had to have a strategy and a plan and proactive marketing,” Schwartz explains. “So we formed the team. I became the head of it and we started investing.”

TIAA-CREF commits to a wide array of private equity funds including distressed debt, distressed equity, venture, growth capital, buyout, energy, infrastructure, and timber. Geographically, about 66 percent of commitments are US-based, while the remainder goes to Europe and emerging markets including Japan, India, Russia, South Africa and Australia. It also does roughly 15 co-investments per year, which may be debt, mezzanine or a combination of the two.

At the end of 2007, TIAA-CREF's alternative investment portfolio, which includes private equity funds, co-investments and timber, had a net asset value of $5.4 billion. During the year, Schwartz's team committed more than $2 billion to private equity funds, $300 million for co-investments, and another $300 million to timber funds and direct timber investments. This year, it's poised to match, and possibly increase, those amounts.

“Really the last five years, the amount that's been called [has been nearly] equal to the amount we've gotten back – it's unbelievable,” Schwartz says. “So we're sort of running in place in terms of exposure because we keep getting back so much money.”

As of the end of last year, TIAACREF's total fund commitments were $9.4 billion, of which $5.5 billion was drawn down, while distributions were $3.5 billion. In terms of the entire alternatives portfolio, including co-investments and timber, total commitments were $11.3 billion, of which $7.1 billion was drawn down, while distributions were $4.6 billion.

The retirement system's alternative investment exposure has never exceeded around 1.5 percent of its total portfolio regardless of its increasing commitments, Schwartz says “because the more we increase commitments, the more we get back in distributions”.

But her team doesn't think of its programme in terms of exposure as a percentage of total assets, she stresses. “We definitely do not do things that way. It's really just done based on opportunities, and if we think we can get more opportunities, we'll go talk to our CIO,” Schwartz says. “If we think there's not much, there's no obligation to invest or commit the money. We're assessed on our performance not on our volume.”

When a private placement memorandum lands in Schwartz's inbox, which happens roughly 10 times on any given day, she may give it a quick once-over and then assign it to a team member for screening.

“[But] it would be unusual that we get a PPM and it leads to a commitment that year if it wasn't a group that we already had heard of,” she says. “It may lead to us meeting with them and getting to know them, and forming relationships and maybe in the future we'll go into the fund. But we already have a list of all the groups we know will be fundraising in 2008 and 2009 … the ones we want to cultivate relationships with, we are calling on already.”

We're seeing a lot of distressed opportunities this year. And both last year and this year we materially increased the percentage we're investing in distressed debt and equity funds

Sheryl Schwartz

In order to select the right managers with the right strategies, each year the team does a top-down review in which it looks at the market and opportunities it sees from a supply and demand perspective. It also does a bottom-up review, in which it examines funds coming to market and potential partners. From that, it figures out allocations and can “overweight or underweight, depending on where opportunities arise, both in terms of opportunities for strategies and opportunities for great managers”, Schwartz says.

TIAA-CREF's approach to choosing fund managers is to analyse all funds in the market for a particular strategy, such as distressed for control, and then examine key characteristics. The depth of the team, age of its members and their interaction is studied, as is the way they share or concentrate economics. Track records for sourcing and exiting deals, valuations, interaction with boards, how problems at portfolio companies were addressed and companies' EBITDA growth are among a litany of important factors Schwartz rattles off.

“This is an inefficient asset class and all information put together is important,” she says. “All your interactions with [GPs], even basics like just going out and having a cup of coffee” are significant.

In addition to annual strategy sessions, the group also has weekly meetings to discuss who is fundraising, their opinions of groups with whom they've met, how best to prioritise time and – crucially – which deals to do.

“Our approval process requires unanimous consent,” Schwartz says. “So someone can abstain but no one can oppose. If someone opposes we don't do a deal.”

The team decides not to re-up with roughly one out of three managers; TIAA-CREF has 119 relationships with managers to date, 44 of whom it has not invested with again. Theoretically, it would like to reduce its number of relationships, “but as the programme grows and opportunities arise, it doesn't always work out that way”, Schwartz says.

GPs and LPs will in 2008 be more focussed on firms and funds that can truly add value during market downturns or dislocation, Schwartz predicts.

“We're seeing a lot of distressed opportunities this year. And both last year and this year we materially increased the percentage we're investing in distressed debt and equity funds,” she says. Historically, the group had earmarked 10 to 15 percent of its fund commitments to distressed funds, but last year – and likely this year – it was 25 percent.

Separately, TIAA-CREF's buyout fund commitments lean much more toward turnaround funds this year, she says.

“There's a real focus on operations and the expected increased default rates,” Schwartz notes. “I think there's a major flight to quality.”


  • • TIAA-CREF is a non-profit financial services company whose products and services include employer-sponsored and individual retirement plans, education savings plans, annuities, mutual funds, life insurance and brokerage services.
  • • The Carnegie Foundation formed TIAA-CREF in New York City in 1918 as the Teachers Insurance and Annuity Association of America, with an endowment of $1 million from the Carnegie Corporation of New York. Its mission was to provide life insurance and retirement plans to professors and employees of colleges and universities.
  • • The College Retirement Equities Fund (CREF) launched in 1952. The fund invested in common stocks and offered a variable annuity, a method of managing retirement savings and income that was considered radical at the time, but was later adopted by many other companies and retirement systems.
  • • TIAA-CREF is the largest institutional real estate investor in the US, with a global portfolio of direct or indirect investment worth $67 billion.
  • • TIAA-CREF ranked 80th as one of Fortune magazine's 100 Largest US Companies in its April 2007 rankings.
  • • Managers invested with include The Carlyle Group, MatlinPatterson, Providence Equity Partners, Riverside, First Reserve, Hellman & Friedman, Cerberus Capital Management and Warburg Pincus.
    Source: TIAA-CREF and PE Connect