Mr. Cedric Crear, Vice Chair Mr. Mark Alden Mr. Ron Knecht Mr. James Dean Leavitt Dr. Jack Lund Schofield

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1 Minutes are intended to note (a) the date, time and place of the meeting; (b) those members of the public body who were present and those who were absent; and (c) the substance of all matters proposed, discussed and/or action was taken on. Minutes are not intended to be a verbatim report of a meeting. An audiotape recording of the meeting is available for inspection by any member of the public interested in a verbatim report of the meeting. These minutes are not final until approved by the Board of Regents at the May 2012 meeting. BOARD OF REGENTS* and its INVESTMENT AND FACILITIES COMMITTEE NEVADA SYSTEM OF HIGHER EDUCATION Building D, Room 101 College of Southern Nevada 6375 West Charleston Boulevard, Las Vegas March 1, 2012 Video Conference Connection to: System Administration Reno 2601 Enterprise Rd., Reno Great Basin College Elko Berg Hall Conference room, 1500 College Parkway, Elko Members Present: Other Regents Present: Others Present: Mr. Michael B. Wixom, Chair Mr. Cedric Crear, Vice Chair Mr. Mark Alden Mr. Ron Knecht Mr. James Dean Leavitt Dr. Jack Lund Schofield Dr. Jason Geddes Mr. Daniel J. Klaich, Chancellor Mr. Mark Stevens, Vice Chancellor, Finance Mr. Scott Wasserman, Chief of Staff to the Board Mr. Hank Stone, System Counsel and Director of Real Estate Planning Ms. Sandi Cardinal, Assistant Vice Chancellor, Finance Mr. Larry Eardley, Assistant Vice Chancellor, Finance Mr. Vic Redding, Assistant Vice Chancellor, Finance Ms. Ruby Camposano, Director of Banking & Investments Ms. Patty Charlton, CSN Dr. Chemene Crawford, CSN Dr. Joan McGee, CSN Ms. Ellie Oppenheim, DRI Dr. Peter Ross, DRI Mr. Stephen Salaber, DRI Dr. Mike McFarlane, GBC Ms. Diane Wrightman, GBC (INVESTMENT AND FACILITIES COMMITTEE 05/31/12) Ref. IF-2, Page 1 of 10

2 Investment and Facilities Committee Minutes Page 2 Others Present: (continued) Ms. Rachel Solemsaas, TMCC Mr. Gerry Bomotti, UNLV Dr. Gregory Brown, UNLV Dr. Bill Boldt, UNLV Foundation Ms. Rochel L. Goldblatt, UNLV Rebel Yell Dr. Shannon Ellis, UNR Mr. Tom Judy, UNR Mr. Reg Chhen Stewart, UNR Mr. Ron Zurek, UNR Mr. Dan Neverett, WNC Mr. David Breiner, Cambridge Associates Ms. Wendy Walker, Cambridge Associates Mr. Raymond Ritchie, Nye County School District Dr. William Roberts, Nye County School District Faculty senate chairs in attendance were Ms. Tracy Sherman, CSN; Dr. Sarah Negrete, GBC; Ms. Mary Arbutina, NSHE; Dr. Gregory S. Brown, UNLV; and Mr. Jeffrey Downs, WNC. Student body president in attendance was Mr. Alex Porter, GBC-SGA. Chair Wixom called the meeting to order at 3:03 p.m. with all members present. 1. Public Comment Dr. Gregory Brown, UNLV Faculty Senate Chair, referred to Agenda Item #5 concerning disbursements from the operating pool and operating pool reserve. Dr. Brown said that, speaking on behalf of the faculty, all the institutions are operating on tight budgets, therefore, distributions such as those proposed will need to be discussed carefully and aligned with planning. He urged the Committee not to make the disbursements until there has been further discussion. Regents Alden and Schofield entered the meeting. 2. Approved-Minutes The Committee recommended approval of the minutes from the December 1, 2011, meeting (Ref. IF-2 on file in the Board office). Regent Alden moved approval of the minutes from the December 1, 2011, meeting. Regent Knecht seconded. Motion carried. 3. Approved-Exchange Property at Great Basin College Pahrump Campus (Agenda Item #7) The Committee recommended approval of a direct exchange of the Pahrump High Tech Center (owned by the Nevada System of Higher Education) for the vacant Mt. Charleston Elementary School campus (owned by the Nye County School District), subject to terms and conditions approved by the Chancellor after consultation with the Chair of the Investment & Facilities Committee (Ref. IF-7 on file in the Board office). (INVESTMENT AND FACILITIES COMMITTEE 05/31/12) Ref. IF-2, Page 2 of 10

3 Investment and Facilities Committee Minutes Page 3 3. Approved-Approval to Exchange Property at Great Basin College Pahrump Campus (Agenda Item #7) (continued) Ms. Lynn Mahlberg, President, GBC, introduced Nye County Superintendent of Schools, William Roberts, CFO Raymond Ritchie and Ms. Diane Wrightman from GBC. Dr. Roberts stated that the Board of Trustees from the Nye County School District favors the transfer of properties between NSHE and the District. He believed it would facilitate learning for both organizations. Regent Alden moved approval of a direct exchange of the Pahrump High Tech Center (owned by the Nevada System of Higher Education) for the vacant Mt. Charleston Elementary School campus (owned by the Nye County School District), subject to terms and conditions approved by the Chancellor after consultation with the Chair of the Investment & Facilities Committee. Regent Crear seconded. Motion passed. Regent Melcher felt the physical separation of campuses was a useful move for the Nye County School District, GBC and NSHE. It is a great opportunity. Chair Wixom asked about renovation costs. President Mahlberg said there would be minimal costs. GBC is already paying all the electrical on the Front Valley Campus. The Mt. Charleston Elementary School has a main building and modulars. Not all of the modulars will be opened initially. Outside of the cost of moving, large expenses are not anticipated. Chair Wixom understood that operationally the ground lease has to be terminated. President Mahlberg said Mr. Daniel J. Klaich, Chancellor, will be working on the conveyance of the easement. Chair Wixom said an appropriate title search is necessary to make sure there are no exceptions to title. Dr. Mike McFarlane, Vice President, Academic Affairs, GBC, said they are working with Mr. Hank Stone, System Counsel and Director of Real Estate Planning, to accomplish the legal matters, including a clear title. Upon a roll call vote Regents Wixom, Crear, Alden, Knecht, Leavitt and Schofield voted yes. Motion passed unanimously. 4. New Business (Agenda Item #8) - Chair Wixom explained that the reference material for the meeting of March 9, 2012, was distributed to each Committee member (on file in the Board office). He requested that it be reviewed before the meeting. Mr. David Breiner, Cambridge Associates, said that the March 9th meeting will be a time to talk about the Endowment s investment policies, (INVESTMENT AND FACILITIES COMMITTEE 05/31/12) Ref. IF-2, Page 3 of 10

4 Investment and Facilities Committee Minutes Page 4 4. New Business (Agenda Item #8) - (continued) financial objectives and asset allocation, and will serve as an educational tool. It will be broken into two parts: policy review and implementation. 5. Approved-Asset Allocation and Investment Returns (Agenda Item #3) The Committee recommended approval of Cambridge Associates rebalancing recommendation to direct $10 million from the operating cash accounts into the global ex-us Equities (International Equities) with $5 million allocated to Manning & Napier and $5 million allocated to MFS International. The Committee recommended approval of Cambridge Associates recommendation to make a $5 million commitment to a private natural resources fund within the endowment pool, specifically to the Commonfund Capital Natural Resources Partners IX. Mr. Breiner said that page 1 of the report (on file in the Board office) outlined performance for the endowment through December 2011, which ended positive in the fourth quarter. The System s return for that quarter was 5.1%, which brought the full year to negative 1.9% and behind the policy benchmark for the year. This was a result in being underweight in U.S. Equities, which held up relatively well, and underperformance on the part of the bond manager, PIMCO, which had a rare misstep earlier in the year. PIMCO has since recovered from that. It ended roughly in-line with peers for the year and ahead of the policy benchmark on a three year basis. Mr. Breiner continued that page 2 was a summary of the operating fund performance, which was positive in the fourth quarter by 3.1%, which was helped by the U.S. Equity allocation. The results left the full year 2011 positive 0.7% and ahead of the policy benchmark, resulting from being very cash-heavy in the operating fund, and significantly underweight in International Equity. Mr. Breiner stated that page 17, asset allocation for the endowment, showed an underweight in Public Equity, or common stocks, by approximately 5 percentage points and overweight in alternative assets -- Hedge Funds and Private Equity -- by approximately 6 percentage points. Mr. Breiner indicated that there were no rebalancing recommendations, given that this will be re-visited at the Investment and Facilities Meeting on March 9, Regent Knecht was confused about ending underweight in Public Equity in both pools when those markets went up so strongly throughout the year. Mr. Breiner responded that in the endowment it was largely a counterweight to being quite overweight in Private Equity. Private Equity cannot be rebalanced, and there was a large commitment made to Drum Capital. Cambridge did not feel it was prudent to also overweight the Public Equity side. This was kept underweight to keep the overall equity risk in check. (INVESTMENT AND FACILITIES COMMITTEE 05/31/12) Ref. IF-2, Page 4 of 10

5 Investment and Facilities Committee Minutes Page 5 5. Approved-Asset Allocation and Investment Returns (Agenda Item #3) (continued) Mr. Breiner said that the operating pool has been transitioning from Hedge Funds into International Equity managers. He is working closely with Ms. Ruby Camposano, Director of Banking and Investments, and Vice Chancellor of Finance Mark Stevens on funding the revised asset allocations. Mr. Breiner was not comfortable allocating additional cash until Ms. Camposano was certain about having an adequate surplus to fund the revised asset allocation. Regent Knecht asked about the manager allocation versus strategic allocation on page 28 in the operating fund the key factor would be to liquidate the absolute return and begin building up the Global ex U.S. Equity and reduce the short-term bonds and cash. Regent Knecht did not understand ending up short, relative to the strategic target with Global ex U.S. Equity. Mr. Breiner said that there is a residual piece in the Hedge Funds largely due to side pockets so there are illiquid investments that the fund managers made that need to be liquidated. Regent Knecht noted that U.S. Equity was restored to the target completely. Mr. Breiner said the low-risk assets were funded first. The equity funding began with U.S. Equity because there were questions around the prior International Equity fund manager. The point was to avoid giving them money, terminating them, and then taking the money back. Mr. Breiner explained the rebalancing recommendation is to continue to deploy the excess cash. In January 2012, $10 million was deployed from cash to International Equity. The recommendation is to continue in that vein and reallocate an additional $10 million from cash to International Equity, which is underweight by 6 percentage points versus the target. It is recommended to split that between the two new managers now in place. Regent Knecht moved approval of Cambridge Associates rebalancing recommendation to direct $10 million from the operating cash accounts into International Equities, with $5 million allocated to Manning & Napier and $5 million allocated to MFS International. Regent Crear seconded. Motion passed. With respect to the $5 million new commitment to a Private Equity Fund, Regent Knecht noted that $5 million will be put into one of two natural resources funds and asked which countries economies are involved. Mr. Breiner said one factor is where the assets are domiciled as the company s base. Most are the U.S. or Canada. Natural resources are an indirect play on emerging markets and drivers in demand, like China, generally. So, there is an indirect exposure and risk to demand coming from emerging growth in China. (INVESTMENT AND FACILITIES COMMITTEE 05/31/12) Ref. IF-2, Page 5 of 10

6 Investment and Facilities Committee Minutes Page 6 5. Approved-Asset Allocation and Investment Returns (Agenda Item #3) (continued) Regent Knecht asked about India and Brazil. Ms. Wendy Walker, Cambridge Associates, said that between the two funds, Park St. Capital will have up to 25% located outside of North America, which will primarily be mining concerns, so Brazil and Australia would be involved there. Commonfund Capital Natural Resources will have up to one-third of its managers located outside of North America, and a more diversified set of companies. Regent Knecht asked if South Africa would be involved. Ms. Walker was not sure if either fund made a significant commitment yet. Regent Knecht asked for reassurance that there will not be much in Russia. Mr. Breiner said Cambridge will have to do some investigation to respond to that question. Chair Wixom would like some level of due-diligence to evaluate the funds. Mr. Breiner said Cambridge is conducting due-diligence, and monitoring, on both of these funds. Ms. Walker clarified that commitments that limited partners make to these partnership vehicles are made before the funds actually make the underlying investments. Cambridge can look into the geographic exposures of their prior funds, but there is no guarantee that the next fund they manage will be invested in the same geographies. Regent Knecht would like a short, succinct indication to determine the domicile and the effective regional investment. Mr. Breiner said the second part, where the end product is being sold, is a difficult analysis. Mr. Henry Stone, System Counsel and Director of Real Estate Planning, pointed out that when the new contract with Cambridge Associates was established the level of due-diligence was increased with respect to private equity managers, but the list of due-diligence obligations is shorter with respect to marketable managers. There would not be that difference absent Cambridge making a commitment to conduct enhanced levels of due diligence with respect to private equity mangers. Chair Wixom added that the Committee needs to be careful not to go beyond the contractual agreement with Cambridge Associates. Mr. Breiner said the breakdown within the International Public Equity portion of the pools is 8% in the Americas, which is split between Canada and Latin America; 69% is in Europe, which is split between the U.K., 18%, and Europe, 50%, which is mainly northern and central Europe; and 20% in Asia, led by Japan at 9% and emerging Asia at 7%. (INVESTMENT AND FACILITIES COMMITTEE 05/31/12) Ref. IF-2, Page 6 of 10

7 Investment and Facilities Committee Minutes Page 7 5. Approved-Asset Allocation and Investment Returns (Agenda Item #3) (continued) Regent Alden moved approval of Cambridge Associates recommendation to make a $5 million commitment to Private Equity investment within the endowment pool, specifically to Commonfund Capital Natural Resources Partners IX. Regent Knecht seconded. Motion carried. Mr. Breiner said one of the advantages of being a long-term pool like the endowment for the private equity recommendation is that there is return opportunity associated with being willing to lock-up capital. It is an inconvenience, but if a high-quality fund is chosen, there is a return for that commitment. There has been inactivity on the private side by design because of the investment in Drum Capital, and becoming totally illiquid was not desirable. However, Drum Capital is beginning to distribute capital and will hopefully do so over the next two years. The Endowment should begin now to make fresh commitments because the private side of the portfolio needs to be constantly maintained and fed. Now there seems to be a quality opportunity with the natural resource private equity fund-of-funds. Ms. Walker said pages 10 through 14 discussed two fund-of-funds: Commonfund Capital Natural Resources Partners IX, a $750 million fund, and Park St. Capital Natural Resource Fund V, a $200 million fund. Both are established, stable organizations with long-standing natural resources programs. They have established relationships, below-average fees, and have posted internal rates of return more than the asset weighted benchmark. Commonfund Natural Resources Partners VIII has had extraordinarily strong returns resulting from some opportunistic investments made during the financial crisis. These results are not necessarily expected going forward for this or the next fund. Ms. Walker stated in the System s current private portfolio, page 24, there is the Endowment Energy Partners IV investment started in It is a prior fund from Commonfund in their natural resources program. The System enjoyed a 25.8% internal rate of return, which exceeded the median benchmark of 22.9%. Higher returns can be realized in certain environments. Ms. Walker pointed out that of the eight private funds in the Endowment, six are managed by Commonfund Capital, which is part of the reason for promoting Commonfund over Park St. because the System already has audit relationships and oversight relationships; by adding another fund from the same manager, it reduces the administrative burden and oversight costs of System staff. Regent Knecht said that page 11 indicated that the fund will commit capital to approximately 15 underlying funds and a substantial amount will likely be oil and gas related. Ms. Walker pointed out that roughly 80% of the Commonfund (INVESTMENT AND FACILITIES COMMITTEE 05/31/12) Ref. IF-2, Page 7 of 10

8 Investment and Facilities Committee Minutes Page 8 5. Approved-Asset Allocation and Investment Returns (Agenda Item #3) (continued) private equity investment is expected to be targeted to various oil and gas sectors, whereas Park St. will have approximately 55% allocated to oil and gas, with a higher allocation to timber and farmland. Regent Knecht stated that the outlook for gas has become so plentiful on a sustained and very long-term basis that the price is lowering. Ms. Walker said the underlying sub-categories of oil and gas exposure of the Commonfund fund will be allocated to 10%-20% to energy infrastructure, up to 10% in clean energy; also, there is latitude and flexibility across both the oil and natural gas spectrum. This is a team that has invested together in the natural resources space across numerous hydrocarbon price cycles and has achieved rather strong returns across many of these because it is their daily activity to find the relative opportunities across the spectrum, given all of the macroeconomic conditions cited. Ms. Walker stated that they have direct oil and gas property acquisition. Mr. Breiner noted that the fund itself is not engaged in hedging, but the underlying portfolio companies will be hedging the exposure. Regent Knecht said that policy-driven cleantech investment is turning out to be a bad investment. 6. Approved-Operating Pool Reserve Update (Agenda Item #4) The Committee recommended approval to transfer $30 million from the operating pool reserve account into the market fluctuation account. Ms. Camposano reported that the balance of the operating pool reserve account as of February 29, 2012, was a positive $38.6 million. The only activity in the account was monthly investment distributions to the campuses at a rate of 2%. Chancellor Klaich suggested making a transfer of up to $30 million to the market fluctuation account because of the uncertainty of the market. No deposits have been made to the fund since it was established. Ms. Camposano said the principal value as of February 29, 2012, was $635 million. The limitation of the transfer would be 5% of the pool; therefore the $30 million is within the established parameters. Regent Crear believed this action fell within the Committee s fiduciary responsibility. Vice Chancellor Stevens felt it a prudent move to transfer some of the reserve into the market fluctuation/reserve account it is just a matter of how much. He added that a Board motion would be required to distribute money from the account once it has been transferred. Regent Leavitt moved approval to transfer funds from the operating pool reserve account into the market fluctuation account. Regent Crear seconded. (INVESTMENT AND FACILITIES COMMITTEE 05/31/12) Ref. IF-2, Page 8 of 10

9 Investment and Facilities Committee Minutes Page 9 6. Approved-Operating Pool Reserve Update (Agenda Item #4) (continued) Regent Wixom requested a friendly amendment to include the transfer of $30 million, specifically. Regent Leavitt accepted the friendly amendment. Regent Crear accepted the friendly amendment. Motion carried. 7. Information Only-Proposal Regarding Distributions from the Operating Pool and Operating Pool Reserve (Agenda Item #5) The Committee discussed the proposal that monthly distributions from the operating pool, which were reinstated in July 2011, be utilized to provide a source of funds for institutions to match grant and contract activities. Regent Geddes said the intent of this item was to have requirements and goals in the four point plan made to the Legislature in regards to increasing the research and development plans by 10%. As the budget was being cut, the amount available for matching grants was being reduced such as the applied research initiative which was zeroed out at most of the campuses. The majority of grants require some percentage to match. The attempt was to make the funds available to the campuses if they had matching fund requirements for the workforce research grants. Chancellor Klaich is not in favor of this recommendation because opportunities may come up for these funds and restricting them may prove to be a drawback. The institutions have requested more autonomy and flexibility with the distributions. They will be held accountable with strict metrics for research and development grants. Regent Knecht understood that the presidents were against this action and asked if anything has changed in recent months. Regent Geddes said he was hearing from the campuses that grants were being turned down for lack of matching funds. He still hears those types of issues. He would not object to withdrawing this proposal as long as the campuses have the funds available and are doing what they can to get to that 10% goal that was promised to the Legislature. He wants to be certain that grants are not being lost due to not having the matching funds. Regent Leavitt believed there should be no restrictions to the institutions. The presidents have expressed that the preference is to have flexibility. Chair Wixom would like each of the campuses to define their research and development plans for increasing matching funds for grants and contracts by 10% for the next Board meeting in June (INVESTMENT AND FACILITIES COMMITTEE 05/31/12) Ref. IF-2, Page 9 of 10

10 Investment and Facilities Committee Minutes Page Information Only-Proposal Regarding Distributions from the Operating Pool and Operating Pool Reserve (Agenda Item #5) (continued) Regarding the second part of the agenda item, Chair Wixom indicated he would be hesitant to designate $7 million in funds for one-time activities based on today s earlier motion to move $30 million into the market fluctuation account, which would then leave the balance at under $10 million. 8. Approved-Lease of Retail Space in the Joe Crowley Student Union to Wells Fargo Bank UNR (Agenda Item #6) The Committee recommended approval of a lease with Wells Fargo Bank for retail space in the Joe Crowley Student Union (Ref. IF-6 on file in the Board office). Chair Wixom recused himself because Wells Fargo is a client of his firm. Dr. Shannon Ellis, Vice President, Student Services, UNR, explained that this follows the standard template used for all the other retail vendors in the Joe Crowley Student Union. Regent Geddes noticed that when banks are brought on campus they usually waive the ATM fee for students and asked if that was that the usual procedure. Dr. Ellis responded that Wells Fargo will be reducing the fee, but not waiving it completely. Regent Knecht moved approval of a lease with Wells Fargo Bank for retail space in the Joe Crowley Student Union. Regent Leavitt seconded. Motion carried. Chair Wixom abstained. 4. New Business (Agenda Item #8) (continued) Chair Wixom has evaluated comparable investment systems for the past year. For the last five to 10 years, this Investment and Facilities Committee has done a remarkable job. While there have been fragile moments, policy has been adjusted accordingly and everything has turned out fine. Chair Wixom expressed his appreciation to the Committee. 9. Public Comment None. The meeting adjourned at 4:20 p.m. Prepared by: Submitted for approval by: Nancy Stone Special Assistant & Coordinator to the Board of Regents Scott G. Wasserman Chief of Staff to the Board of Regents (INVESTMENT AND FACILITIES COMMITTEE 05/31/12) Ref. IF-2, Page 10 of 10