State Universities Retirement System of Illinois Serving Illinois Community Colleges and Universities 1901 Fox Drive Champaign, IL 61820-7333 (217) 378-8800 (217) 378-9802 (FAX) Investment Department To: Investment Committee From: Daniel L. Allen, Kimberly K. Pollitt, CFA, & Gabriel Ayoroa Date: May 30, 2013 Re: Private Equity Emerging Manager Fund of Funds Provider Search Recommendation Overview and Recommendation In March 2012, the Board approved a Private Equity Funding Plan for calendar years 2012 to 2014. The plan includes the following multi-year allocations: Calendar Year Commitment Amount 2012 $300 million 2013 $100 million 2014 $250 million SURS objective is to continue making commitments to achieve the current private equity funding plan of $650 million in total during calendar years 2012-2014. Thus far, the following commitments have been made, totaling approximately $325 million: In March 2012, the Board approved the first step toward implementing the funding plan with $100 million in commitments to the Adams Street 2012 Global Fund, L.P. ($80 million) and the Adams Street Global Secondary Fund 5, L.P. ($20 million). In October 2012, SURS committed approximately $125 million to the Pantheon USA Fund IX, L.P. ($85 million) and Pantheon Europe Fund VII, L.P. ( 30.5 million). In December 2012, the Board approved a $100 million commitment to the Adams Street 2013 Global Fund, L.P. At the September 13, 2012 Investment Committee meeting, the Board approved the recommendation that a search be conducted to identify a private equity emerging manager fund of funds provider. This allocation will assist SURS in meeting its goal that 10% of new commitments in alternative investments be awarded to qualified firms owned by minorities, females and persons with a disability (MFDB), as documented in the Investment Policy. The mandate will focus exclusively on private equity funds with greater than 51% ownership held by minorities, females, or persons with a disability, as defined by statute. The private equity emerging manager fund of funds search process resulted in ten candidates responding to the Request for Proposal (RFP), with six firms subsequently selected as semifinalists for the mandate. Semi-finalist interviews were conducted during May 2013, resulting in the search team selecting three strong candidates to present to the Board for consideration. Staff and Callan are recommending retention of one of the following firms: Manager Credit Suisse Customized Fund Investment Group Fairview Capital Partners J.P. Morgan Investment Management City, State New York, NY West Hartford, CT New York, NY
Search Process The search process has been conducted consistent with legislative requirements and SURS normal practices as defined in the Investment Policy: Callan and SURS staff developed a Request for Proposal (RFP) for the search process. SURS posted the RFP on its website and advertised nationally in Pensions & Investments, Emerging Manager Monthly and the state newspaper. Ten firms, including three MFDB firms, responded to the Request for Proposal. Callan and SURS staff reviewed RFP responses resulting in the identification of six semifinalist candidates using the following criteria: Organizational depth and strength Experience managing customized MFDB portfolios Asset/client base MFDB related mandates Access to recognized top tier MFDB partnerships Ability to provide diversification of underlying partnerships by vintage year and investment strategy Investment strategy Track record Investment Management Fees Compliance capabilities Callan and SURS conducted meetings with the semi-finalists to interview key personnel. Trustee Craig McCrohon also participated in a portion of the semi-finalist interviews. Callan and SURS staff identified three finalist candidates. Reasons for elimination of the remaining seven firms can be found in Appendix A. Callan provided the Board of Trustees a report evaluating finalist candidates. Negotiations regarding fund terms have been initiated. Finalist candidates are scheduled to present to the SURS Board of Trustees. Firm and Fund Summary Information The evaluation process conducted by the search team identified the strongest candidates for consideration by the Board of Trustees. As a result of the due diligence process, the following firms described below have advanced in the process and have been invited to present to the Board at the June 13, 2013 Investment Committee meeting: Credit Suisse Customized Fund Investment Group The Customized Fund Investment Group (CFIG) is based in New York, New York and was established in 1999. The firm currently resides within the asset management division of Credit Suisse, a wholly-owned subsidiary of Credit Suisse Group AG, a listed Swiss corporation. Credit Suisse is currently in the process of divesting certain of its private equity businesses, including CFIG. The firm is an experienced private equity investor in the MFDB manager space, with commitments over $600 million in 51%+ MFDB ownership partnerships since 2003. Fairview Capital Partners Fairview Capital Partners is based in West Hartford, Connecticut, and was founded in 1994 as an independent firm that provides investment advisory services to the Fairview family of diversified fund of funds. The firm s management company is owned equally by the two
founding partners, JoAnn H. Price and Laurence C. Morse, Ph.D. Fairview has a long, consistent history investing in the MFDB manager space and has committed more than $200 million to 51%+ MFDB ownership partnerships since 2003. J.P. Morgan Investment Management J.P. Morgan Investment Management is based in New York, New York. The Private Equity Group was founded in 1980 at AT&T Investment Management Corp. and in 1997 at JPMorgan Chase. J.P. Morgan Investment Management is an indirect wholly owned subsidiary of JPMorgan Chase & Co., a publicly traded corporation that is listed on the New York Stock Exchange. The firm has made private equity commitments of approximately $200 million to 51%+ MFDB ownership partnerships since 2003. J.P. Morgan has been a signatory to the Principles for Responsible Investment (PRI) since 2006. Commitment Amount/Funding Although this mandate is somewhat challenging due to its narrow focus, staff and Callan have been encouraged by the strength of the candidates involved in the search process. As a result, staff and Callan are recommending a commitment of up to $75 million for this mandate. This allocation, coupled with the commitments to Adams Street Partners and Pantheon Ventures mentioned previously, would complete the $400 million in commitments projected for the first two years of the three year private equity funding plan. In addition, the $75 million commitment to MFDB partnerships would represent 11.5% of the three-year funding plan total, ahead of the 10% goal set forth in the SURS Investment Policy. Funding for the mandate will be achieved over the next several years as capital will be requested as needed by the manager. The source of the funds for the capital calls will likely be the public U.S. equity and/or fixed income asset classes, depending on the asset allocation of the SURS Investment portfolio at that time. Conclusion Staff and Callan believe the comprehensive search process conducted has resulted in the identification of three highly qualified firms, any of whom would complement the existing private equity portfolio. The selection of one of the presenting firms should provide a solid foundation for future investment within the private equity portfolio while complementing and diversifying the existing manager lineup. The manager selected will be expected to build a portfolio of primary investments, secondary investments and co-investments that is diversified by vintage year and strategy. The conclusion of this search continues implementation of the Private Equity Funding Plan approved in March 2012. Manager Profiles Profiles of the presenting firms are included in the materials provided. Recommendation Staff and Callan are recommending one of the three firms presenting, Credit Suisse, Fairview or J.P. Morgan, be selected with up to a $75 million commitment amount. The fund structure will be Fund of One in nature regardless of which firm is selected. Fund of One structures are limited partnership structures in which there is only one limited partner investor, in this case SURS. This allocation, which would represent 11.5% of the three-year private equity funding plan total, will assist SURS in increasing assets with MFDB firms.
SURS staff and Callan jointly recommend the following: That a commitment of up to $75 million be authorized, contingent on successful contract negotiations to.
Appendix A Reasons for Elimination BAML Capital Access Funds Management Slightly more favorable relative options available Less compelling long term track record although recent performance is more favorable Gray & Co. Did not adequately respond to RFP Media reports raised concerns over perceived conflicts of interest Hewitt EnnisKnupp Limited history in private equity MFDB market Primarily non-discretionary advisors (consulting firm structure) Less competitive management fees Invesco Private Capital Better relative options available Short track record Limited level of assets under management in the MFDB space Muller & Monroe Asset Management Muller & Monroe Asset Management voiced concerns with the execution of the mandate Less competitive management fees Neuberger Berman Limited history in 51%+ MFDB ownership space Volatility concerns due to the concentrated nature of the fund structure Key person concerns StepStone Withdrew from consideration