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Florida sees quick returns from most recent in-state investments

Florida's in-state program is split between two different managers and several different tranches dating back to 2009.

Florida Retirement System Trust Fund‘s in-state investment program has seen positive returns on its most recent capital commitments, but the program still trails the $183 billion pension fund’s internal private equity benchmarks.

Florida did not indicate it was concerned about the program’s performance. Both Florida staff and Hamilton Lane, which manages most of the in-state program, stressed its wide diversification and Florida focus make benchmarking difficult.

The program’s mandate is to invest up to 1.5 percent of the fund’s assets in “technology and growth enterprises that have significant presence in Florida.”

The program’s market sectors include space technology, aerospace and aviation engineering, computer technology, renewable energy and medical and life sciences.

“Our goal is to generate the best possible returns for Florida SBA in the context of investing exclusively in Florida, secondly, it’s driving liquidity, and third, it’s having Florida impact,” said Hamilton Lane’s Nayef Perry at the pension’s March 30 investment advisory council meeting.

In private equity, the system committed $1 billion to the program overall. Hamilton Lane manages $875 million of that while JP Morgan Asset Management controls the remaining $125 million.

Most recently, the pension committed $125 million to Hamilton Lane in 2019, as Buyouts reported.

Program performance

Hamilton Lane manages two vehicles, Florida Growth Fund I and Florida Growth Fund II.

The funds are a mix of direct investments made in the state of Florida and commitments to private equity funds managed by firms with strong presences in the state.

Fund I is split into two private equity tranches and one credit tranche, with respective commitments of $250 million in 2009, $150 million in 2012 and $100 million in 2014. Fund II is split into two tranches of $250 million in 2015 and $125 million in 2019.

As of September 30, 2020, Fund II’s first tranche, which has a 2015 vintage, had a net internal rate of return of 6.2 percent and tranche II, a 2019 vintage, had a net IRR of 20.6 percent. In total, Fund II had a 6.7 percent net IRR and a 1.2x net multiple of invested capital.

Fund I’s two PE tranches had an 11.3 percent net IRR and a 1.6x MOIC combined. Fund I’s credit investments had a 9.1 percent net IRR and a 1.2x MOIC.

The numbers for Fund II’s second tranche were especially good, coming in over 2,600 basis points above its benchmark. Hamilton Lane’s Ankur Dadhania said the tranche broke its J-curve in two to three quarters as opposed to the more common 14 to 18 quarters.

Hamilton Lane said its program created almost 20,000 jobs since inception and put $1.50 in capital expenditures into Florida for every $1.00 of investment from the program.

The remaining $125 million is managed by JP Morgan Asset Management as the Florida Sunshine State Fund. It has also shown promising early returns despite its recent vintage.

As of March 15, the private equity group had invested $41.5 million of the commitment since the fund’s December 2018 inception date. As of September 30, 2020, that fund had an 18.5 percent net IRR and a 1.2 percent MOIC.

External vs. internal benchmarks 

While all the tranches of the Hamilton Lane funds beat the firm’s benchmarks, the internal Florida private equity benchmark adds a premium which the overall program has not beaten.

Hamilton Lane measured its returns using the Russell 2000 public markets index. Internally, Florida uses the Russell 2000 plus a premium of 300 basis points to measure all of its private equity holdings, including the in-state investments.

Fund I, excluding the credit investments, returned 11.3 percent since inception against a 9.4 percent benchmark. After the premium is added, that becomes 12.4 percent.

Fund II had a 6.7 percent return versus a 4 percent return for its benchmark, which becomes a 7 percent benchmark adding the premium.

Even with the premium, Fund I and Fund II’s second capital tranches both beat Florida’s internal benchmark, however.

Both Florida and Hamilton Lane played down any performance concerns.

“The Florida Growth Funds’ opportunity set is defined by its Florida focused mission and therefore is somewhat narrower than standard public market benchmarks,” a Florida spokesman said in a statement.

Hamilton Lane said the different capital tranches had very diverse strategies and a Florida focus, which made benchmarking them “complex and challenging.”

“Hamilton Lane has frequent conversations with FL SBA to evaluate tranche performance by strategy, vintage year, and asset type using various public and private benchmarks,” the firm said.

“With a holistic review of performance measures and considering the fund objectives and the opportunity set available to the fund, we engage in regular dialogue with the manager about both past performance and opportunities to enhance returns,” the Florida spokesman said.

Action Item: read the materials for Florida’s March 30 State Board of Administration meeting here.