Launching a private equity programme in the depths of the worst financial crisis since the Great Depression might seem like a risky gamble.
However, according to Lamar Villere, the direct of private equity at the Tennessee Consolidated Retirement System, kick-starting the strategy at a time when many other limited partners were ducking away from the market in fear proved to be advantageous.
“[That environment in 2009] enabled us to go into a lot of GPs that historically, even a year or two earlier, wouldn’t even have returned my calls,” Villere said in an interview last week. “The market in 2009 was a difficult and scary world for GPs trying to raise capital when the bulk of their LPs were either over-allocated or facing real liquidity issues and the last thing they needed to do was put money in an illiquid asset class they couldn’t control.
“We were in a great position to get access,” Villere said.
'LP of choice'
Hired in 2009, Villere, who had spent four years working on alternative investments at the Illinois Teachers’ Retirement System, got to work building a fledgling portfolio that included some of the biggest names in the business. Villere, who announced last week he was stepping down from his role at Tennessee, said he believes his legacy at Tennessee will be one of turning the retirement system into “the LP of choice”.
“We tried to make ourselves the best of all worlds – generally what that means is we tried to look and behave like an endowment, being able to act quickly and efficiently,” Villere said. “At the same time, we started in 2009 when a lot of other endowments were struggling with liquidity, and liquidity was not nor would it conceivably be a problem for us. [We were able to tell GPs], we’ve got deep pockets, lots of liquidity and you never have to worry about us making a capital call.”
With this pitch, Tennessee, which had been authorised in 2008 by the state Legislature to allocate 3 percent (with a 5 percent cap) of its total assets to private equity, started to build a collection of high profile GPs. It’s first-ever commitments went to Hellman & Friedman, TA Associates and Kholsa Ventures. The portfolio also includes managers like Draper Fisher Jurvetson, Oaktree Capital Management, Berkshire Partners, Denham Capital, Advent International, KPS Capital Partners and Bain Capital.
KPS was a good example of the system’s ability to get access to a manager in high demand. KPS earlier this year closed its fourth fund on its hard-cap of $3.5 billion after about 10 weeks in the market, enjoying a high level of re-investment from its existing LP base. This left little room for new capital into the fund, but Tennessee was able to get a spot because of the relationship building done over the past few years, Villere said.
“We’ve spent a lot of time with the team at KPS getting to understand them,” Villere said, crediting Cambridge
We were in a great position to get access.
Associates, the system’s private equity advisor, for making the introduction. “[Cambridge] has done a great job helping us think about the groups we really need to get ourselves positioned with.”
Tennessee doesn’t wait until a manager it is interested in to hit the fundraising market to make an introduction, Villere said. “When we identify them we start talking to them whether they’re fundraising now or in five years,” he said.
The system recently broke the $1 billion commitment level to private equity, Villere said. It’s not clear if the system will hire a new private equity head; in the interim, senior portfolio manager Daniel Crews will take over the private equity portfolio.
Performance is still hard to gauge on the portfolio because of its youth, but for the first quarter, the private equity portfolio generated a 1.6 percent return, and has produced a 9 percent return since inception, according to the system's first quarter investment report. Tennessee expects to make several commitments in the first half of 2013, including building exposure to “smaller sized buyout funds”, the report said.
Villere, meanwhile, is heading to New Orleans to join with Villere & Company, an investment firm his family started in 1911. The firm, which works in investment management advisory services, launched the Villere Balanced Fund, an independent mutual fund, in 1999. The fund is allocated to traditional asset classes like stocks and bonds, Villere said, and he doesn’t anticipate moving the focus into alternatives.
While he is leaving the alternative investment world, Villere is proud of the programme he started at Tennessee.
“This portfolio is unmatched … with great managers and a well thought out collection of funds,” he said. “The state of Tennessee will enjoy some great returns. Our numbers have been positive … but the real returns … are yet to come. Unfortunately I won’t get to see all the numbers, but I look forward to keeping an eye on it.”