Comprehensive Annual Review Process

Transcription

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2 Agenda I. Private Equity Program: A Year in Review II. PE Performance, Portfolio and Compliance III. Private Equity Market Review IV. Forward Looking Plans V. Conclusion 2

3 Section I 3

4 Comprehensive Annual Review Process Why do we conduct annual reviews? Per the TMRS IPS, comprehensive reviews are to be conducted and documented at least annually. The Review Process Includes: Annual due diligence questionnaire, ADV and compliance, as appropriate, are reviewed Includes firm changes, personnel, investment strategy, style, process, and philosophy Compliance, operations, risk management, and performance Both quantitative and qualitative factors The review includes an onsite due diligence visit to the Manager s office The Annual Review process holds TMRS Staff accountable for its portfolio management process in order to preempt manager specific, strategic, or other potential problems. 4

5 PE Program Review Accountability in Action What did we say we were going to do? Private Equity Initiatives Accomplished: Annual Review Establish a due-diligence process to identify best in class manager opportunities Sourcing, investment and operational due diligence, and leveraging Staff and consultant relationships were key factors enabling the identification of opportunities Initiate & execute on manager selection, negotiation, and funding while maintaining consideration of portfolio construction and diversification looking forward 5 years Recommendations and approval of selected manager investments and funding are executed on a dynamic timeline taking into account anticipated portfolio diversification and market regimes Progress Private Equity Portfolio towards a target NAV while managing commitment levels, portfolio construction and access to best in class managers Commitment levels, portfolio construction, and access to best in class managers have been successful, but deployment somewhat outside of our control has been a bit slower than expected. Construct and maintain the PE portfolio to accomplish TMRS investment objectives of return driver $1.8 billion of private equity capital committed since Dec The risk/return profile of the invested portfolio achieves TMRS investment objectives Monitor existing portfolio. Source, research, and pursue new strategies and coinvest opportunities Additional strategies, including international exposure, earlier stage venture and co-investments may be used to further optimize the portfolio as well as blend down fees with existing funds Status 5

6 PE Program Review Accountability in Action PE Commitment Timeline 1. Carlyle EMOF II (Special Sits) 2. TPG/TSSP III (Special Sits) 3. HIG Bayside IV (Special Sits) 4. Searchlight II (Buy-out) 5. Harvest VII (Buy-out) 6. Tritium I (Buy-out) 7. PSG II (Growth) 8. Updata V (Growth) 9. Mercato III (Growth) 10. Foundry Next (VC) 11. GSO COF III (Special Sits) 12. GSO COF III Co-Inv (Special Sits) 13. Kainos Capital (Buy-out) 14. FTV (Growth) 15. Incline (Buy-out) 16. Altaris IV (Buy-out) 17. Altaris Constellation (Buyout) 18. Marlin V (Buy-out) 19. Marlin Heritage II (Buy-out) 20. Capital Partners (Buy-out) 21. One Rock II (Buy-out) 22. GTCR XII (Buy-out) 23. PSG III (Growth) 24. Dunes Point ( Buy-out) 25. Lightbay (Special Sits) 26. CapVest IV (Buy-out) 27. Foundry 2018 (VC) 28. Providence VIII (Buy-out) 29. TPG/TSSP IV (Special Sits) 30. TPG/TOP IV (Special Sits) 31. HIG SPF (Buy-out) 32. HIG Co-Investment (Buyout) 33. Tritium II (Buy-out) 34. Main Post II (Growth) $350 million approved $317 million committed $ million approved $ million committed $502.5 million approved $ million committed $663 million approved $221.6 million committed $410 million in negotiations Strong planning, execution & portfolio management has put TMRS on the path to achieving strategic investment objectives. 6

7 PE Program Review Accountability in Action Additional Information Funds & Capital Approved & Closed: 2015 Funds Approved: Capital: $350 mm approved / $317 closed 2015 Average weeks to close: 8.4 weeks 2016 Funds Approved: Capital: $ mm approved / $ closed 2016 Average weeks to close: 5.3 weeks 2017 Funds Approved: Capital: $502.5 mm approved / $ closed 2017 Average weeks to close 4.7 weeks 2018 Funds Approved: Capital: $663 mm approved / $221.6 closed & $410 in negotiations 2018 Average weeks to close: 7.9 weeks to close Total Managers / Vehicles: 23 / 34 Total Direct Capital Committed: $1.944 bil approved $1.79 bil closed $154.5 million in cutbacks Strong execution & portfolio management has driven performance and put TMRS on the path to achieving strategic investment objectives. 7

8 PE Program Review Accountability in Action PE Staff Resources Private Equity Chris Schelling Peter Teneriello Admin. Support Cindy Morse Debbie Farahmandi Compliance Kurt Cressotti PE Team Experience Chris Schelling 18 years experience Asset Management, Broker/Dealer, Researcher, Consultant & Pension experience MBA, MSF Chartered Alternative Investment Analyst Peter Teneriello 6 years experience Private Equity Analyst, Venture Capital Analyst, Finance and Operations Risk Management Dimitry Shishkoff Melissa Jerkins Ryan Conner Absolute Return Mark Leavitt Kevin Notaro Real Assets Tom Masthay Eddie Schultz Yvonne Huang CIO TJ Carlson Operations Sally Case Geldon Vlluha Susan Jaques Public Equity Kristin Qualls Carol Leung Fixed Income Jason Weiner German Gaymer Jacob Bowland 8

9 PE Program Review Accountability in Action Additional Information Buy-out Growth Special Sits Secondaries Other Total Meetings In Meetings In Meetings In Meetings In TOTAL Total Managers Internal Data Base Buy-out 213 Venture/Growth 196 Special Sits 167 Secondaries 40 Other 57 Total 673 Other Over 1,800 man-hours in meetings. Data Rooms Researched 141 Formal Reference Calls 165 Background Checks 87 Personality Inventories 53 up from 522 in 2017 As of September 1,

10 PE Program Review Accountability in Action Annual Review Highlights Manager & Consultant Scorecard Summary: All 23 manager relationships and 1 consultant relationship assessed are in satisfactory standing. Excellent In Good Standing Fair Unsatisfactory Comprehensive (working with manager) (remedial action being taken) Review Contractual Compliance: All managers, as appropriate, have certified compliance with relationship governing documents, including: Valuation policies Regulatory actions Code of Ethics compliance LPA/side letter compliance Monitoring and Review Summary: Quarterly monitoring, annual reviews (including annual onsite, due-diligence), ad-hoc reviews, capital calls reviews, LPAC meetings Manager Reporting: DDQ, ADV, Annual Audited Financials, Quarterly Capital Account Statements, Investment Commentary, Investor Letters, ILPA Templates and fee disclosures StepStone Reports: Investment Due Diligence, Operational Due Diligence, Meeting Notes, Manager Summaries, Quarterly Portfolio Monitoring, Exposure Reporting and Market Reviews IPS Compliance and Monitoring at the Portfolio Level 10

11 PE Program Review Accountability in Action Manager Performance Monitoring Prior Fund Current Fund 100% 100% 80% 23.3% 33.3% 46.7% Top Quartile 80% 22.2% 44.4% 44.4% Top Quartile 60% 40% 36.7% 30.0% 33.3% Second Quartile Third Quartile 60% 40% 33.3% 33.3% 33.3% Second Quartile Third Quartile 20% 0% 30.0% 30.0% 13.3% 10.0% 6.7% 6.7% DPI TVPI IRR Fourth Quartile 20% 0% 44.4% 11.1% 11.1% 11.1% 11.1% DPI TVPI IRR Fourth Quartile DPI TVPI IRR DPI TVPI IRR Prior Fund Average Quartile Rank Current Fund Average Quartile Rank

12 Section II 12

13 Private Equity Asset Class Objectives IPS Stated Objective for the Private Equity Portfolio: The Private Equity asset class is intended to enhance the total fund performance through investment in non-publicly traded securities by generating a long-term rate of return that exceeds that of publicly-traded equities. A primary goal of the annual review presentation is to discuss the Private Equity portfolio and its construction relative to IPS stated performance goals & implementation objectives: Performance Goals: Long-term performance objective is a rate of return of Russell 3, % or greater, net of investment management fees, over period of five years. For periods less than 5 years, reported performance is less meaningful and significantly more difficult to benchmark. Measures of success are portfolio construction: identify best in class managers, balance concentration and diversification, ensure sufficient strategy diversification, etc. 13

14 Private Equity IPS Compliance Items Vintage Year Concentration TMRS has not breached the 35% concentration limit in any calendar year. Manager Concentration TMRS is within the limits of 1) 35% of total assets of the PE portfolio invested with any one PE manager and 2) 25% of the total assets under management for any PE manager. Vehicle Concentration TMRS is in compliance with the 25% limit to any given investment vehicle. Co-Investment TMRS is within co-investment guidelines. TMRS has 2 coinvestment funds and no direct co-investments. Valuation Policy TMRS managers are in compliance with IPS valuation policy requirements. 14

15 Private Equity Asset Class Objectives Private Equity Benchmark and Performance Considerations Role of Benchmark Has PE done better than simple, liquid approach? Has PE staff performed acceptably? How has PE portfolio performed relative to similar peers? How does PE performance compare to risk taken? Has PE achieved long term assumptions? Benchmark Characteristics Investable Measurable/Transparent Comprehensive Representative/Appropriate Strategic 15

16 Private Equity Asset Class Objectives Private Equity Benchmark and Performance Considerations Public Equity Plus Premium Fund Index Benchmark Absolute return or peer comparison Pros: - Investable? - Measurable & transparent - Strategic - Simple! - Measurable - Comprehensive - Highly appropriate and representative - Possibly strategic - Possibly representative Cons: - Premium not investable! - Not comprehensive - Not representative of risk or timing - Not investable - Not highly transparent - Not strategic Not timely - Not investable Not comprehensive - Not necessarily appropriate Long term, opportunity cost Short term, opportunity set 16

17 Private Equity Asset Class Objectives Private Equity Benchmark and Performance Considerations Public Equity Plus Premium Majority of pensions (59%) use as public equities as proxy. Of this, 67% use 300 bps. Fund Index Benchmark 25% of state plans use fund index, including ILPA, Cambridge, Burgiss and State Street. Absolute Return 4% Actual 9% State Plan PE Benchmarks Other 4% Public 3% Public + <3% 11% Other Absolute return target (8.3% on average) Actual, CPI + 5.5% Fund Index 25% Public + 3% 39% Public + > 3% 5% Source: 2018 PFDE Survey 17

18 Performance MKT VAL (MM) % of plan 1 Month 3 Months YTD 1 Yr. ITD Incept Date TMRS TOTAL PRIVATE EQUITY $ TOTAL PRIVATE EQUITY INDEX Excess BUY-OUT TOTAL $ BUY-OUT TOTAL INDEX Excess VENTURE-GROWTH TOTAL $ VENTURE-GROWTH TOTAL INDEX Excess SPECIAL SITUATIONS SUB TOTAL $ SPECIAL SITUATIONS TOTAL INDEX Excess Source: State Street Investment Analytics 18

19 Performance Comparisons 40% 30% 35.0% Private Equity Performance 20% 10% 18.3% 16.7% 13.4% 17.0% 13.8% 13.4% 12.0% 12.1% 12.2% 0% 1 Year 3 Year TMRS PE Texas TRS PE TCDRS PE Texas ERS PE UTIMCO All PE 40% 35.0% Private Equity Performance 30% 20% 10% 16.4% 16.5% 16.4% 17.0% 16.2% 11.8% 10.0% 11.3% 10.0% 0% 1 Year 3 Year TMRS R3+3 ILPA Burgiss (15-18) CMA As of June 30,

20 Performance Comparisons 20

21 Private Equity J-Curve $150 J-Curve Effect 50% $100 $50 Outlay Inflows IRRs 25% Cash Flows $0 ($50) ($100) 0% -25% IRRs ($150) Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10-50% Cash outflows, fees, expenses, and little appreciation recognized early results in negative early reported returns. Capital gains upon realizations later in the life of the fund turn the internal rate of return positive. 21

22 TMRS Realized J-Curve 40% J-Curve 30% 20% 10% 0% -10% -20% -30% -40% -50% 0.00% 1.55% 17.04% 6.57% Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10 Individual PE Fund Average PE Portfolio 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% TMRS 2.0% Net 2.0% 2.0% Source: State Street Investment Analytics 22

23 Performance Comparisons 160% Cumulative Return Comparison 150% 140% 130% 120% 110% 100% 90% 80% TMRS PE Russell 3, % ILPA Cambridge Burgiss (15-18) Capital Markets Assumption Source: State Street Investment Analytics 23

24 Implementation Risk Ranges Implied by IPS Asset Class Guidelines March 2018 = Realized risk 13.6% 24

25 Performance Review Source: StepStone Monitoring Report, March 31,

26 Vintage Year Diversification $175.0 $212.0 $238.8 $145.3 $377.5 $1,148.5 Source: StepStone Monitoring Report, March 31,

27 Deployment Pace Source: StepStone Monitoring Report, March 31,

28 Net Asset Growth $450,000,000 $400,000,000 $350,000,000 Private Equity Net Asset Value 30% 25% PE Value $300,000,000 $250,000,000 $200,000,000 $150,000,000 $100,000,000 $50,000,000 20% 15% 10% 5% Percent of Commitments $0 4Q Q Q Q Q Q Q Q Q Q Q % Buy-out Special Sits Venture-Growth % Deployed Source: State Street Investment Analytics 28

29 Strategy & Manager Diversification Private Equity Strategy Diversification by Commitment Private Equity Strategy Diversification by NAV 21.8% 22.8% 55.3% Buy-out (40% to 75%) Growth/Venture (10% to 40%) Special Situations (5% to 35%) 25.6% 38.3% 36.1% Buy-out (40% to 75%) Growth/Venture (10% to 40%) Special Situations (5% to 35%) Private Equity Manager Diversification by Commitment BO 1 BO 2 BO 3 BO 4 BO 5 BO 6 BO 7 BO 8 BO 9 BO 10 BO 11 BO 12 BO 13 BO 14 GE 1 GE 2 GE 3 GE 4 GE 5 GE 6 SS 1 SS 2 SS 3 SS 4 SS 5 Private Equity Manager Diversification by NAV BO 1 BO 2 BO 3 BO 4 BO 5 BO 6 BO 7 BO 8 BO 9 BO 10 BO 11 BO 12 BO 13 BO 14 GE 1 GE 2 GE 3 GE 4 GE 5 GE 6 SS 1 SS 2 SS 3 SS 4 SS 5 29

30 Sub-strategy Diversification Buy-out Sub-strategy Growth/VC Sub-strategy 24.3% 10.6% Small Buy-out (>$2bill) Middle Buy-out ($2 bil - $5 bil) 8.8% 13.2% Early Stage VC Late Stage VC 65.1% Large Buy-out (<$5 bil) 78.0% Growth Equity Special Situations Sub-strategy 19.0% Mezzanine 23.9% 57.2% Performing Stressed Distressed for Control 30

31 Geographic & Sector Diversification Private Equity Geographic Diversification by Commitment Private Equity Geographic Diversification by NAV 9.0% 24.6% U.S.A. International U.S.A. International 75.4% 91.0% Sector Diversification by Commitment Sector Diversification by NAV 4.0% 9.0% 5.0% 14.0% 10.0% 36.0% 22.0% Healthcare General Services IT Financials Energy Consumer Industrial 2.8% 16.6% 14.4% 7.3% 12.5% 40.1% 6.3% Healthcare General Services IT Financials Energy Consumer Industrial As of March 31, 2018, TMRS had exposure to 245 separate portfolio companies. Source: StepStone Monitoring Report, March 31, 2018 & TMRS Staff 31

32 Regional Diversification

33 Section III 33

34 Private Equity Fundraising 34

35 Private Equity Deal Flow Global Quarterly Private Equity-Backed Buyout Deals, Q Q ,400 $160 1,200 $140 No. of Deals 1, $120 $100 $80 $60 $40 Aggregate Deal Value ($bn) 200 $20 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q $0 No. of Deals Aggregate Deal Value ($bn) Source: Preqin 35

36 Private Equity Valuations 12x Private Equity Valuation Levels 10x 9.7x 9.1x 8.9x 9.6x 8.8x 10.3x 10.0x 10.3x 10.0x 10.6x 10.2x Multiple of EBITDA 8x 6x 4x 3.2x 3.9x 7.7x 6.2x 3.9x 4.1x 3.7x 3.9x 4.3x 4.5x 4.3x 4.6x 4.0x 2x 6.5x 5.2x 5.0x 5.5x 5.1x 6.3x 5.7x 5.8x 5.7x 6.0x 6.2x 0x 1.5x Debt / EBITDA Equity / EBITDA Valuation / EBITDA Source: Preqin 36

37 Private Equity Exit Environment Global Quarterly Private Equity Buyout-Backed Exits, Q Q $ $160 $140 No. of Exits $120 $100 $80 $60 $40 $20 Aggregate Exit Value ($bn) 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q Year $0 No. of Exits Aggregate Exit Value ($bn) Source: Preqin 37

38 Private Equity Exit Environment 38

39 Private Equity Performance Source: ILPA 39

40 Private Equity Performance Source: Pitchbook 40

41 Private Equity Performance 2500% Cumulative Return Comparison 2000% 1500% 1000% 500% 0% 12/1/1996 8/1/1997 4/1/ /1/1998 8/1/1999 4/1/ /1/2000 8/1/2001 4/1/ /1/2002 8/1/2003 4/1/ /1/2004 8/1/2005 4/1/ /1/2006 8/1/2007 4/1/ /1/2008 8/1/2009 4/1/ /1/2010 8/1/2011 4/1/ /1/2012 8/1/2013 4/1/ /1/2014 8/1/2015 4/1/ /1/2016 8/1/2017 All BuyOut Early Stage VC Growth All Debt 1 Yr 5 Yr 10 Yr All BuyOut 20.1% 13.5% 9.1% 13.1% Early Stage 16.1% 16.0% 10.4% 15.4% Growth 15.2% 12.5% 9.2% 11.4% All Debt 10.8% 8.3% 7.7% 10.8% Source: Burgiss 41

42 Private Equity Performance Return Historical Risk/Return 17% Early Stage 16% 15% 14% 13% Small Buy Out 12% Large Buy Out Growth 11% Mezzanine Distressed 10% 9% 8% 0% 10% 20% 30% Risk Return 17% 16% 15% 14% 13% 12% 11% 10% 9% Expected Risk/Return Mezzanine Growth Small Buy Out Large Buy Out Distressed Early Stage 8% 0% 5% 10% 15% 20% 25% 30% Risk Source: Burgiss, TMRS Staff 42

43 Section IV 43

44 Private Equity Pacing $2, Staff Pacing Model 16% $2,400 $2,200 $2,000 $1, $2, $2, $2, $2, $2, % 12% $1,800 Value in US$ (Millions) $1,600 $1,400 $1,200 $1,000 $ $1, $1, % 8% 6% % of Total Plan Value $800 $600 $ % $400 $200 $- $500 $525 $525 $525 $550 $600 $625 $650 $650 $ E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2% 0% Private Equity NAV Annual Commitment PE % of Plan Target % of Plan 44

45 Private Equity Agenda Target annual commitment of $525 million for 2019 (plus potential $150 MM in opportunistic secondary exposure) Continue to map European private equity market and search for new GP relationships to modestly add exposure Continue to investigate processes for co-investments, as well as strategic partnerships and other innovative structures Continue FIRCAP initiative core private equity 45

46 Private Equity Agenda More Expensive Direct Investor Strategic Capital Direct Fund Fund of Funds Highly Sophisticated Institutions Sophisticated Institutions Sophisticated Institutions Subscale Institutions Asset Managers Separate Accounts, Co-Invest, etc. Resourced Institutions Resource Constrained More Specialized Expertise 46

47 Permanent Capital Partnership FIRCAP initiative: A private equity partnership established by a small group of limited partners, with stronger LP oversight Perpetual structure Lower fees, expenses and transaction costs Better alignment of interests Over a year in private discussion and negotiation of strategy, structure and terms Initial discussions with potential teams Next step: Letter of Interest 47

48 Section V 48

49 Conclusion TMRS has made substantial progress towards its strategic private equity objectives. Deployment has been a bit slower than expected, and there is still more work to be done. Interim measures of performance are very strong, but it remains too early to be certain. Private equity continues to become increasingly competitive and transactional in nature. An adaptive organization will be successful in the long run, but static policies and processes can be damaging. Governance and policies should evolve accordingly. On the back of such evolution, additional opportunities such as coinvestments, as well as innovative new structures and models, can allow TMRS to establish a reputation as a thought leader within the private equity marketplace. 49

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