LP corner, week of Feb. 1, 2010

NY State Common CIO says LP has a placement agent workaround

Raudline Etienne

, CIO of the New York State Common Retirement Fund, said that the LP’s emerging managers program will resolve the dichotomy of banning placement agents, while remaining committed to new, smaller funds.

“We looked at our portfolio, and it’s the early funds—funds one through three—that we made the most money on. So, in time we will identify the next generation of emerging managers to back,” said Etienne, speaking last week at the Private Equity Analyst Outlook Conference in New York.

Etienne was asked how the fund might reconcile its emerging managers program with its recent ban on placement agents, a result of the pay-for-play debacle that has played out since the summer.

Young funds, with fewer resources to dedicate to fund-raising, often need placement agents to get a foot in the door, but also tend to perform better, as New York State Common has found. Etienne said the firm has enacted an emerging manager program to avoid missing out on new, small funds.

Last year, New York State Common backed about five new emerging managers, and Etienne said it is “very possible” the firm will make another commitment this year.

New York State Common recently hired Parish Capital Advisors and Bank of America to run the program in addition to having Assistant Comptroller Tyson Pratcher to manage it internally.

“In terms of the perceived potential disadvantage on missing out on smaller or newer firms, we want to mitigate that by making sure we have emerging manager programs throughout all of the asset classes,” Etienne said. “ We use advisors. We’ve also hired two partners whose job is to listen, seek and make sure they have an open door for those managers. For me, that program mitigates that risk. Nothing’s perfect.” —Erin Griffith

Iowa to scale back on PE in 2010

The $19 billion Iowa Public Employees Retirement System recently set a cap of $400 million for private equity commitments this year, down from last year’s cap of $500 million and half the $800 million cap in 2008.

Unlike many other pensions, Iowa’s board does not approve individual commitments. Instead, advisory firm Pathway Capital Management has discretion to make pledges up to a maximum annual dollar amount agreed upon each year by the board. The adviser is not required to commit the full amount each year.

The model tries to align the commitment pace with that needed to allow the pension to achieve its 10% private equity target and to maintain the allocation within the allowed range of 7% to 13 percent.

The adviser initially recommended a maximum commitment amount of $481 million for 2010 and $500 million in future years, which would have maintained the private equity program above 10%, but within the allowed ranges, until the year 2021.

The state pension fund’s staff, however, felt it would be better to lower the amount to $400 million now to try to bring the actual allocation closer to the target over the next five years.

In fiscal 2009, which ended June 30, the LP committed $456 million to 13 new partnerships.

Past commitments include $49 million to CVC European Equity Partners V, a pan-European buyout fund; $41 million to H.I.G. Bayside Debt & LBO Fund II, which invests in distressed debt obligations and other securities of distressed mid-market companies; $45 million to Madison Dearborn Capital Partners VI, a North American buyout shop that specializes in communications, consumer goods, financial services and health care; and $45 million to buyout fund Onex Partners III. —Nancy Gordon

LA seeks to hire general consultant

The $9.6 billion Los Angeles City Employees’ Retirement System is seeking a general pension fund consultant to have broad oversight over alternative investments, although the pension fund continues to rely on specialty consultants for its real estate and alternative investments.

In 2008, LACERS committed about $300 million to the private equity asset class. It backs buyout, distressed debt, venture capital, mid-market growth, mezzanine, funds of funds and special situations vehicles.

Responses to the request for proposals were due Jan. 27, with the contract starting on July 1.

The city pension fund has a 9% target allocation to private equity, with a range of 6% to 12 percent. The actual funded allocation stands at 9.1%, or $870 million in 80 commingled funds.

In August, the city pension fund pledged up to $20 million to mega-fund Hellman & Friedman Capital Partners VII and up to $20 million to TA Associates’ mid-market growth capital and buyout vehicle TA XI.

Other recent pledges include $10 million to Falcon Strategic Partners III, a pool earmarked for mezzanine investments in the lower middle market, and $20 million to Lindsay Goldberg III, earmarked for investments in North American manufacturing, financial services and health care companies. —Nancy Gordon

New Mexico seeks Aldus replacement

The $8 billion New Mexico Educational Retirement Board has issued a request for information for a specialist consultant in private equity to replace disgraced adviser Aldus Equity Partners. The LP terminated Aldus Equity as its private equity investment adviser in April in response to an alleged kickback scheme involving several state plan sponsors, including the New York State Common Retirement Fund, in which pension fund cronies allegedly received payments in return for private equity pledges made by the pension funds.

In July, New England Pension Consultants took over the management of the limited partner’s private equity program with a six-month contract.

Responses were due on Jan. 28, with the contract likely to begin on July 1.

In the fall, the retirement board committed $45 million to the $5 billion-targeted secondary fund Lexington Partners VII and $40 million to Drug Royalty II, a $500 million-targeted fund investing in pharmaceutical royalty interests.

The pension fund has a target allocation to private equity of 10 percent. As of October, the retirement board’s commitments to the asset class totaled about $700 million, or 8.8% of total pension fund assets, to 24 private equity funds. A little more than 2% has been drawn down so far. —Nancy Gordon