Gary Bruebaker is set to retire as chief investment officer at Washington State Investment Board at the end of the year after 18 years in the role.
He’ll remain engaged with the $128 billion pension – which has a $20.98 billion allocation to private equity and commits almost $2 billion a year to the strategy – until April 2020 to help with the transition.
Bruebaker recently spoke with Private Equity International about how the private equity industry has changed since he began his career almost four decades ago.
How has the private equity market changed over the years?
I have been investing for 41 years, and it is not that surprising, but the degree of change in private equity – indeed private markets – is remarkable. The number of GPs and LPs have grown, GPs have gone public and significantly increased their product offerings.
Over my investing lifetime, GPs changed their investment strategy from pure financial engineering to more value creation, along with exponential development and institutionalisation of the investor process.
There was also the formalisation of 100-day plans, which earlier in my career I had never even heard of.
In some cases, GPs didn’t even have advisory committees, and then went to having formalised investment advisory boards and expanded communications around the investment process.
The first 20 years I was in business we didn’t even know how the GPs were making money. We knew about the management fee, we knew about carried interest, but we didn’t know about directors’ fees or transaction fees. In the beginning, these did not exist and LPs were slow to know about them when they were added.
There is definitely a lot of discussion around fees and costs for the last two decades and I honestly think we have a healthier relationship today with our GPs than we had in the beginning. When I first started there was no transparency. Now, most GPs have become comfortable with added transparency and the public scrutiny that comes with investing with public pension systems. But the transparency must be balanced by the need to be competitive in the marketplace, so public LPs also adhere to that balance.
How did the private equity portfolio at Washington SIB evolve?
Before I joined SIB, I was at Oregon Investment Council, and both [funds] have similar stories. In the beginning, it was all a KKR story. The GP comprised more than 85 percent of our portfolios.
Over time we developed more mature programmes. Today we have 47 core relationships in the $21.82 billion private equity portfolio. As long as they continue to do what they said they would do and nothing changes here, our premise is that we will renew with each of their private equity funds.
Too many GPs in a portfolio become difficult to manage, and you just become an index of private market investments. We can’t make a bunch of $100 million commitments and move the needle. While we don’t have a target, we try to commit in excess of $200 million per fund and, except in very special circumstances, we don’t want to be the whole fund.
What is your opinion on the different strategies and products offered by GPs?
To be honest with you, if you said “Bruebaker, would you rather the GPs continued to do this or do nothing but private equity investments?”, my response would be – maybe because I am old – I’d rather go back to the days of private equity investors just being private equity investors. If you look at firms like Hellman & Friedman, that’s what they do. They do just private equity.
Larger firms like Blackstone and KKR have several strategies. We tend to, for the most part, not be one of those players that invest in all strategies of a GP. For instance, with Blackstone we don’t invest in anything except its private equity funds. There is an exception with KKR but for the longest time we still invested in its private equity funds and did not go into its credit, real estate, infrastructure funds. Recently we did go into its infrastructure fund after we took a really hard look at it.
I don’t disagree with GPs who say that having other product lines creates synergies for them and they do get some benefits from that, but it also spreads the cream at the top a little thinner, across the various products that they are offering.
How do you think about the GP-LP alignment in private equity?
We will continue to face challenges in maintaining proper alignment of interest with GPs. At the end of the day GPs are capitalists, and we hire them because they are capitalists. At the same time, capitalists are going to want to maximise investment returns, they are going to want to do good for their funds and build good reputations but they will also want to increase their personal net worth.
Every day, my job is to maximise the money my beneficiaries get out of these investment opportunities. Obviously those are conflicting goals, so everywhere we look we have to get the best alignment of interest; the GPs will get rich but only after my beneficiaries get more rich.
How do you expect PE to shape up in the coming years?
Co-investments will continue to grow. LPs will continue to invest directly and compete with GPs. LPs will try and shave some fees off, although my personal belief is that it will be with some mixed results. I look forward to seeing things like ESG being recognised and integrated into the investor process alongside every other relevant investment risk, and becoming the basis for a new product initiative or marketing tactic.
We will continue to see special partnerships or unique arrangements between GPs and LPs. My goal for SIB is to be not necessarily the most liked but certainly the most respected investor in the LP base. So if a GP has a special or unique investment opportunity, we want to be one of the first ones they call. A couple of years ago, we were one of four approached for a fund of one structure – we took advantage of that opportunity and will continue to evaluate unique opportunities and structures.
We don’t invest in secondaries funds but buy secondaries interests ourselves. We did that even before secondaries funds existed and it was a pretty good strategy for us in the beginning. But now there are secondaries funds that are willing to pay more for them than we are. The only transactions we ever see are when a GP wants to close something extremely quickly and quietly and they can give us a call.
How did you deal with the financial system collapse in 2008?
It was impossible to escape it. The price of liquidity went through the ceiling. We worked very closely with our board to ensure we always had their support, and to make sure they had our backs and we were still going in the direction they supported.
We tried to make the best of a bad situation when we needed liquidity. At the same time, we wanted to make sure we were taking advantage – you never want to waste a good crisis because there are always good opportunities that come from it.
During the crisis, there were large public funds that invest in private markets that publicly asked their general partners to stop calling capital because they did not have liquidity to make the capital calls.
But investing is very much a relationship business, so we took that opportunity to call each of our core general partners – we had about 40 then – [and say] we would be there for them when they needed to call capital. We just wanted to reinforce that we would be good for that commitment.
We really took the opportunity to deepen the relationship with them and many of them still remember that today. But it was not easy to do.
What advice would you give LPs getting started in PE?
PE portfolio construction is best done gradually and organically over time and must come at the same pace allowed by the governance structure, investment policies and the LP’s diligence capabilities on hiring the talent pool. Don’t put too much money too quickly to work with perhaps compromised diligence. Every time we increased our PE allocation it has taken us years to fulfill that. In the last two decades, we went from 15 percent to 23 percent, but each time we managed that increase very carefully.
We have a great board so there was no flip-flopping in and out of asset classes due to changes in market and risk environment.
In general, I always like to remind my LP peers this is more about people than money, more about relationships than transactions and more about long-term outcomes than incremental performance.