LP Profile: Tenn. Consolidated Retirement System Tiptoes Into PE

The $26 billion Tennessee Consolidated Retirement System has adopted a cautious approach to private equity after starting its first program dedicated to the asset class in its 37-year history last June.

The pension fund, which provides benefits to 100,000 retired teachers and state and local government workers, is searching for funds with steady, proven strategies. That responsibility rests with the nascent program’s director, Lamar Villere, whom Tennessee Consolidated nabbed in February from the $30 billion Teachers’ Retirement System of the State of Illinois, where he was a senior alternative investment officer. Villere, who reports to Michael Brakebill, CIO of Tennessee Consolidated, has no staff, and there are no plans to hire any. The pension fund has hired Strategic Investment Solutions as a consultant on the program.

Villere began his career in 2005 at Illinois Teachers’, where he oversaw that pension’s public domestic equity portfolio. In 2006, he added a hedge fund program to his responsibilities, and in 2007, he dropped his domestic equity responsibilities while adding private equity to his hedge fund mandate. He is upbeat about the opportunity at Tennessee Consolidated despite the challenges facing buyout firms, in part because of declining deal prices. “Nobody feels great about locking money up in long-term illiquid vehicles, but it’s still a great time to get started,” Villere told Buyouts.

With the country in the midst of one the worst bear markets in memory, Tennessee Consolidated is one of the few institutional investors looking to spend money in private equity. The pension has made no commitments yet, but hopes to start in the second half of this year, Villere said. Tennessee Consolidated, which has lost $5 billion, or 16 percent of its value, since mid-2008 due to the declining stock market, is targeting a 3 percent allocation, meaning Villere has about $800 million to deploy. Tennessee Consolidated expects to reach its allocation in five years.

Villere plans to roughly divide up the allocation among buyout funds, which he expects to account for 50 percent to 75 percent of the program; mezzanine and distressed funds (15 percent to 20 percent), and venture capital funds (10 percent to 15 percent). He also expects to make a smattering of investments in secondary funds.

On the buyout side, Villere plans to concentrate mostly on funds earmarked for investment in U.S. companies, though he will look at funds that target Western Europe, Canada and Japan. He intends to steer clear from emerging markets funds, which he has backed in the past but which he thinks are too risky for a new private equity program.

Consistency Desirable

If you are a general partner interested in securing Tennessee Consolidated as an investor, it helps not to employ a lot of leverage in deals. Villere also said he’d sooner back a firm with a history of scoring lower but consistent returns than one that scored spectacular returns with one fund while stinking it up with the next. “Within a given fund, I don’t like to see a 20x return and a bunch of write-offs,” he said.

At Illinois Teachers’ Villere had success backing funds that were invested across a wide variety of sectors, as well as with sector-specific funds. And he wants to see a healthy GP commitment to the fund. He loves a 10 percent GP commitment, though understands that’s not possible with some firms given the size of their staff and their fund. The point is, he doesn’t want to see something like a 1 percent commitment on a $100 million fund, which he actually has seen. “I want to get a sense that it’s enough to matter, to hurt, but also to show that there’s some real conviction to the fund,” Villere said.

So far, Villere said he has held a handful of meetings with prospective buyout firms. But a look at the firms he backed while at the Teachers Retirement System of Illinois suggests a taste for a broad cross-section of fund sizes and strategies.

Villere recommended $1.5 billion in commitments while there in 17 funds. The funds include large headline-grabbing LBO houses such as The Blackstone Group and Apollo Management, mid-market buyout shops with niche investment specialties such as Vista Equity Partners, and energy sector buyout funds such as the partnership between The Carlyle Group and Riverstone Holdings LLC, to name a few. He also backed hedge funds, venture capital funds, and funds that target deals in Europe and Asia.

Villere declined to say which firms he favors most, but made it clear he would entertain supporting at least some of these firms at Tennessee Consolidated. “It’s nice to have a good group that I’m very familiar with,” Villere said.

Villere remains upbeat about starting the program despite a lack of credit and exit opportunities in the buyout market. Like many limited partners, Villere feels like he has leverage over prospective GPs in terms of setting favorable fee terms, which he naturally prefers as low as possible.

But Villere also thinks the market presents opportunities for buyout firms to maneuver. In particular, he thinks firms that do not rely heavily on leverage for returns can take advantage of depressed prices. And with the IPO market pretty much idle—there were no buyout-backed IPOs in the first quarter, according to data compiled by Buyouts—many capital-constrained companies have few options but to turn to private equity for buyouts, growth financings and other capital needs, he said.