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UTIMCO chief eyes smaller funds: UPDATED WITH VIDEO

  • Zimmerman sifts for talent, likes smaller funds
  • Carlyle’s hire of JPMorgan exec shows PE success
  • Management fees in big funds affects LP, GP alignment

Providing the perspective of a major limited partner on arguably the most high-profile hire by a private equity firm this year at his keynote appearance at the PartnerConnect East 2014 conference, Zimmerman, chief executive and chief investment officer of UTIMCO, said Cavanagh marks an example of the life cycle of big financial service firms now facing more regulation, while private equity gains traction as an asset class.

“He’ll make six times the money and spend less time with government officials,” Zimmerman said of Cavanagh’s new job.

Carlyle Group on March 24 named Cavanagh as co-president and co-chief operating officer. He had been widely seen as a leading candidate to replace Jamie Dimon as CEO of the blue chip financial services company.

His hiring reflects how some alternative money managers are becoming “big and institutionalized,” which could lead to some misalignment of interests between GPs and LPs, Zimmerman said.

As fund sizes increase, management fees become a larger revenue stream and brush against objectives of LPs such as UTIMCO, which manages $36 billion. UTIMCO instead prefers a European waterfall fee model, with a hurdle rate, while it is a “big fan” of carried interest, he said.

For the most part, UTIMCO prefers sifting for smaller funds that may not be as widely known. “Our job is to identify talent … before others do, then we can be one step ahead,” he said.

Zimmerman praised L.E. Simmons, president of Houston-based energy shop SCF Partners, who has kept his fund sizes at $150 million, as “the best private equity investor in oilfield services.” His only complaint about Simmons is “he won’t give us the entire fund.”

Zimmerman said UTIMCO still invests with larger funds and he praised Blackstone Group real estate chief Jonathan Gray. Marc Lasry of Avenue Capital Group and Carlyle Group co-founder David Rubenstein are “the best,” he said.

UTIMCO has also invested about $600 million to $700 million over the past two years in co-investments. But it’s not jumping into hiring specialists to beef up its direct investing program. “We’re not convinced we can hire all the most talented people. … We don’t pay as much as private companies,” he said.

Instead, UTIMCO prefers to meet managers and pick specialists in respective markets and asset classes, including trips to Brazil to find the best investment pros there.

“We travel a lot and we’re not in a rush — we’re long-term investors,” he said. “We try to be counter-cyclical.”

Its long-term horizon allows UTIMCO to handle illiquid investments, but it looks to earn 3 percent to 9 percent ahead of more liquid alternatives in order to make a move into these types of assets.