1. Your office manages $12.8 billion, including $1.3 billion in private equity. Does your size affect the decisions about which funds to invest in and the size of the checks you write?
After a certain size, it’s the color of the chips that determines how you play the game, not the amount of money you attach to each chip. Our system is well funded, not because of any genius on our part, but because our liabilities are under control and our board has kept our assumed rate of return at a low 7 percent. As a result, all I need from private equity are good old-fashioned returns. Just get me the Russell 3000 over a five to seven-year period, and if I get more, I’ll be happy. But I don’t need for private equity to give me the Russell 3000 plus 500 basis points.
2. How much do you commit to private equity each year and how many relationships are ideal?
We probably commit between $150 million and $300 million to private equity each year. There weren’t that many commitments last year, but there are more coming up this year, and that’s due to the funds in the market. We want to keep to around 15 to 20 main relationships. Our view is that we will re-up unless there’s a reason not to. We’re very happy with the robustness of our portfolio and the direction we’re in. We’ve been investing in private equity for a couple of decades now, and it has done exactly what we wanted. The last decade has been great to us, and, like I said, it’s been nice to have the extra returns; but we can go a few years without them.
3. What are you doing in Idaho that’s different from, say, CalPERS?
I don’t have to beat the market. If you need to make more than 5 percent in real returns, you shouldn’t be doing what I’m doing. A number of other pensions like CalPERS are doing more advanced stuff, and they need to make 5 percent to 5.5 percent (real returns), which means they really have to hope for great equity markets over the next two decades.
4. What do you say to those people managing underfunded pensions who feel that they have to try and invest their way out of the holes that they’re in?
If I was in their situation, I’d do the same thing. The problems with pension funds have nothing to do with the investments that were made in the past. We’ve all had about the same returns. Since 1978, our average rate of return has been 9.5 percent. Everybody’s rate of return has been around 9.5 percent. We’ve made more than enough money as long as people put in their contributions.
After years of underfunding the pensions, it’s the political systems’ problem when they put investment managers in that situation. New Jersey, Kentucky, Illinois and all the other states with pensions in trouble, they just didn’t put in their contributions. To now say that the investment managers are taking too much risk, well, that’s not a problem of their making, and I have great sympathy for those investment managers trying to deal with it.
5. What do you get out of attending private equity conferences?
At least 90 percent of my job is looking at stuff we don’t do and making sure that the reasons we’re not pursuing these strategies still hold. In many respects, my job is like being a three-year-old who says, ‘No, I don’t want to.’ The difference is that I need to be able to understand strategies like distressed debt well enough to explain why we’re not investing in them. And, every once in a while, like REITS and TIPS in the late 1990s, there may be something that causes me to add something new to the portfolio.
Edited for clarity by Gregory Roth
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