GI’s Magnuson: Investing with CalPERS, CalSTRS? Prepare to scale.

GI Partners Executive Managing Director Rick Magnuson has some advice for general partners who want to invest with California’s pension giants. 

“You have to be very mindful of fees, and their goals for reducing fees, which we’ve been very accommodating on,” he said in a keynote interview at Buyouts’ PartnerConnect West 2016 Conference in San Francisco in late September. “That means scale. If you scale you can reduce fees and performance stays — hopefully — top quartile, but with billions under management.”

California Public Employees’ Retirement System and California State Teachers’ Retirement System have been increasingly conscious of fees and other costs in recent years. Both recently concluded reviews of some of their core PE partnerships to ensure terms and fee agreements were met.

GI Partners emerged as a top real estate manager for California’s two largest pensions over the previous half-decade. CalPERS tapped GI to manage a $3.4 billion portfolio of infrastructure-oriented real estate assets in 2010. Two years later, the $303.6 billion pension formed a $500 million separate account with the firm for tech-related real estate.

With re-ups, the separate account’s market value had grown to $943 million as of March 31, pension documents showed. The account had returned 13.1 percent net of fees on a three-year basis as of the same date.

CalSTRS set up a similar technology-focused real estate account with the firm in 2012. As of March 31, 2015 — the most recent performance available — the $500 million account had netted a 14.8 percent IRR since inception.

The CalPERS and CalSTRS accounts represented coups for the San Francisco firm, which now manages a $7.2 billion real estate platform in addition to its PE business, currently investing a $2 billion 2014 vintage fund. Securing those commitments came with costs, however, including hiring back-office staff to keep the firm’s real estate and PE platforms in line with the public pensions’ high standards.

Roy Kelvin, the firm’s chief financial officer, joined GI Partners from Vector Capital in 2014. The firm hired David Smolen, formerly senior counsel and chief compliance officer at Silver Lake, the same year.

“You bring on in-house counsel … it’s an initial cost,” he said, commenting on the hiring of new personnel and institutional-quality reporting policies. “It was more hiring [of] the best people. People outside the industry, or real estate, to help put in place our systems and make them institutional quality.”

GI Partners was founded in 2001. The firm has raised $12 billion since its inception.

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Photo by Buyouts staff