Scorecard: San Francisco Builds A Winning PE Portfolio

In a city known for cultivating teams with winning records, be it the Giants or the 49ers, the San Francisco Employees’ Retirement System has built a private equity portfolio whose performance tops anything I’ve come across.

The diversified, 249-fund portfolio, dating back to 1987, has achieved an overall investment multiple of 1.65x as of June 30 for the roughly $15 billion pension fund. For 158 pre-2006-vintage funds, presumably past the j-curve effect, the median net IRR is 12.4 percent. For comparison, consider the performance of 15 institutional investors whose pre-2007-vintage portfolios sister magazine Buyouts analyzed last fall and whose results were presented in the Nov. 14 issue of Buyouts. The highest median fund IRR for those portfolios was 10.3 percent, achieved by Oregon Public Employees Retirement Fund.

The performance of just the domestic buyout funds in the San Francisco portfolio has also been outstanding. The 72 pre-2006-vintage domestic buyout funds, to which San Francisco committed $1.63 billion, have generated a median net IRR of 15.1 percent. Again that beats the 15 institutional investors whose portfolios we analyzed last fall. Tops again among the 15 was the Oregon pension fund, whose median net IRR for domestic buyout funds was 12.1 percent.

So how did San Francisco do it? Robert L. Shaw, acting deputy director for investments, points to several factors, among them an “exceptionally supportive” board with long-serving members. “What it gives you is a deep institutional memory of why things were done.” The pension fund also has cultivated a reputation for being there for its GPs, be it for capital calls or fresh commitments. “The fact that we are a reliable LP has allowed us to get into and maintain relationships with a lot of top-tier funds,” Shaw said.

Like many public pension funds, San Francisco has pushed the pedal to the metal in pre-recession years, then pulled back dramatically in the aftermath. Case in point: The pension fund committed $579.5 million to 24 2000-vintage funds, but just $10 million to a single 2003 vintage fund. Shaw agrees that was probably a mistake, and he said the pension fund, whose private equity target allocation is 16 percent, is committed to maintaining a steady pace of about $300 million to $350 million per year to 12 to 16 funds.

On the other hand, the pension fund has probably been well-served by holding the line on commitment size and not keeping pace with escalating fund size. San Francisco, for example, committed $25 million to the 1996-vintage Madison Dearborn Capital Partners II LP, a $925 million pool. The fund performed well, generating a 2.33x investment multiple and 21.99 percent net IRR.

But 10 years later, after backing two additional Madison Dearborn funds that performed reasonably well, San Francisco committed just $30 million to the 2006-vintage Madison Dearborn Capital Partners V LP. That pool was $6.5 billion, or more than seven times the size of its Fund II predecessor. For comparison, consider the California Public Employees’ Retirement System, which committed $60 million to the same Fund II and $300 million to the same Fund V. Shaw said that keeping commitments sizes in the roughly $20 million to $30 million ranges has been key to maintaining a well-diversified portfolio.

Below is a look at the top-10 performing pre-vintage-2006 domestic buyout funds from San Francisco portfolio.

David M. Toll is editor-in-charge of Buyouts Magazine.


[slide title=”10. Hellman & Friedman Capital Partners III”]

Vintage: 1995

Net IRR: 34.48%

Investment Multiple: 2.29x

Commitment: $24.1 million

[slide title=”9. Friedman, Lowe Capital Partners LP”]

Vintage: 1999

Net IRR: 35.02%

Investment Multiple: 3.11x

Commitment: $20 million

[slide title=”8. First Reserve Fund X LP”]

Vintage: 2004

Net IRR: 35.57%

Investment Multiple: 1.90x

Commitment: $15.0 million

[slide title=”7. TPG Partners LP”]

Vintage: 1993

Net IRR: 36.77%

Investment Multiple: 3.71x

Commitment: $29.2 million

[slide title=”6. Apollo Investment Fund V LP”]

Vintage: 2001

Net IRR: 39.33%

Investment Multiple: 2.68x

Commitment: $20 million

[slide title=”5. Blackstone Capital Partners IV LP”]

Vintage: 2002

Net IRR: 40.35%

Investment Multiple: 2.77x

Commitment: $32.4 million

[slide title=”4. ABRY Broadcast Partners II LP”]

Vintage: 1995

Net IRR: 47.34%

Investment Multiple: 3.34x

Commitment: $5 million

[slide title=”3. First Reserve Fund IX LP”]

Vintage: 2001

Net IRR: 48.44%

Investment Multiple: 3.00x

Commitment: $30 million

[slide title=”2. Advent VII LP”]

Vintage: 1993

Net IRR: 55.44%

Investment Multiple: 3.76x

Commitment: $7.5 million

[slide title=”1. Vestar Equity Partners II LP”]

Vintage: 1993

Net IRR: 57.19%

Investment Multiple: 3.54x

Commitment: $12.6 million