Just two months after stepping down as Washington State treasurer, a position he held from 2009 to 2017, James McIntire joined Star Mountain Capital as a part-time senior adviser.
At the New York firm, which channels money to lower-mid-market companies both directly and through fund investments, McIntire plans to help attract more public pensions as clients.
It is a market he knows well. McIntire as treasurer held a seat on Washington State Investment Board, which oversees some $112 billion in state pension money, including $17.5 billion in private equity. As vice chairman (2010-2011) and chairman (2012-2014) McIntire oversaw the expansion of the private equity portfolio both into smaller funds and internationally into Europe, Asia and South America. The board also reduced its number of core GP relationships to the 35-45 range.
We caught up with McIntire this week to ask five questions:
What will you be doing for Star Mountain?
My goal is to try and help the firm gain access to a number of pension funds that are interested in being a player in the smaller end of the private equity business. Many of the larger pension funds, or at least the ones with larger private equity allocations, have difficulty getting access to those funds. And that’s largely a function of economies of scale. When you have quite a bit of private equity money to put to work, and limited staff, you need to be able to put fairly sizable amounts of money to work at any given time. As a result it’s difficult for big pension funds to be able to put to work amounts of, say, less than $150 million at a time. Most pension funds have limitations on what percentage of a fund they can account for. At Washington it’s 20 percent. So if you have a $500 million fund, the most they can put in is $100 million. It makes it difficult to get access.
How did the private equity program evolve at Washington State Investment Board during your tenure?
Washington got into private equity back in the early 1980s. When I came on to the board, KKR was still a very significant part of our portfolio. We had gone through a rapid ramp-up. The board a year or two prior to my joining had increased the target allocation up to 25 percent and had made a number of significant investments in 2006 and 2007. I think our staff did reasonably well managing the private equity portfolio through the difficulties of the downturn. But at the same time we decided that we wanted to develop more of a model portfolio, something more balanced, so that no GP would account for more than 15 percent of the portfolio, and the next four or five would have no more than 10 percent each. We also wanted to get exposure to the small and middle- market part of the world. And we were looking for geographic balance between the United States, Europe and Asia and to some degree South America. We did ramp back that target allocation later as the amount of money coming back grew, along with the challenge of putting that money back to work. We felt we didn’t want to overreach, so we ramped back our allocation target to about 23 percent. Private equity continues to be a very healthy and active program. We also still have a very significant and profitable relationship with KKR. It’s just not quite as dominant.
How did you get access to smaller funds?
We worked with our consultant Hamilton Lane to try to identify new opportunities and relationships. I think we did reasonably well at that. Did we hit our precise target? I don’t think so. But we continued to work at it. Some pensions have chosen to back stand-alone funds dedicated to backing small and middle-market funds. But that creates difficulties for that fund manager because they’re putting a lot of eggs in one basket. And if they also manage more diversified funds, they have the challenge of how to allocate their fund slots. We need to find a better way for pension funds to play in the small-to-mid-cap market.
You’ve advocated GPs sharing more information with investors on fees and expenses. When all is said and done, is private equity worth the money?
When we evaluated asset classes, we always evaluated them in terms of their expense. We looked at their return net of fees. If an asset class is giving us more than 13 percent on an annualized basis net of fees on a long-term basis, that’s a pretty good asset class, and we were doing that in private equity. Would we have invested in private equity regardless of how much they charge in fees? I don’t think so. We paid very close attention to fees because of the size of the program. When you have an $18 or $19 billion private equity program, and you can invest hundreds of millions of dollars in any given fund, you’re going to be able to negotiate some pretty good fees.
Earlier in your career you worked for then-Sen. and former Vice President Hubert Humphrey (D-Minnesota). What was that like?
Humphrey was an innovator. He loved great ideas. He started his career working for some of the youth administration programs that came out of the New Deal, helping to create jobs for people in Minnesota. He always said the best social program is a job. He understood the value that work brings and the dignity it brings to people. There are a vast number of small businesses in this country looking to grow and expand. Star Mountain invests in companies generating less than $15 million in EBITDA. They come in to finance growth, to help grow small businesses and create jobs. For me that felt like the right kind of fit.
Edited for clarity