You may be wondering: Do I have to travel to Hawaii to secure a commitment? A spokeswoman for discretionary advisor Hamilton Lane wrote in an e-mail that it is “absolutely not” necessary to go there. ”Investment opportunities will follow (the) Hamilton Lane vetting process and we have investment teams across the globe to handle due diligence,” she added.
Perhaps the $13.7 billion pension fund’s most attractive feature is that, with just 3.8 percent of its assets invested in private equity as of March 31, it remains well below its target allocation of 7 percent. And it doesn’t anticipate hitting its target until 2018. Along with private equity, the Employees’ Retirement System of the State of Hawaii had a real estate target allocation of 7 percent as of year-end and a real return (including timber) target allocation of 5 percent.
Vijoy Chattergy, chief investment officer, said that Hamilton Lane has committed about $135 million this year to funds on the pension fund’s behalf, including distressed debt fund American Securities Opportunities Fund III LP, growth equity fund JMI Equity Fund VIII, and Providence Debt Opportunity Fund III LP. Chattergy said the target commitment pace for this year is about $200 million, and he foresees a similar pace in years ahead. International funds, mid-market buyout funds, small-market buyout funds are of particular interest as the state tries to reduce its exposure to venture capital from about a third of the portfolio to 15 percent to 20 percent over time, he said.
The private equity program as of March 31 divided into two parts—a $509.7 million diversified portfolio of buyout, venture capital, mezzanine, growth equity and related funds managed since year-end by Hamilton Lane and a far smaller, $12.1 million portfolio of venture funds managed by Macquarie Funds Group. The oldest fund in the Hamilton Lane portfolio has a vintage year of 1997; that in the far-younger Macquarie Funds Group portfolio is 2011.
Altogether the Hawaii state retirement system had committed $1.3 billion to 158 funds in the Hamilton Lane program, including interests in 16 funds purchased on the secondary market, according to a Dec. 31 report prepared by the Bala Cynwyd, Pennsylvania-based adviser. It is a buyout-heavy portfolio. Of its total commitments, the state pledged $763 million to 72 buyout funds; $246 million to 51 venture funds; $137 million to 21 growth equity funds; $80 million to six special situations funds; $27 million to seven mezzanine funds; and $10 million to a single distressed debt fund, according to the report.
From 1997 to 2011, the state typically committed anywhere from $30 million to $90 million per vintage year to five to 15 funds, with a notable outlier being the 2006 vintage. That vintage year the pension fund committed $116 million to 17 funds. Also noteworthy has been a big bump-up in commitment pace in both 2012, when the state committed $254 million to 20 2012 vintage-year funds, and last year, when the state committed $213 million to 10 2013 vintage-year funds. The state’s average commitment size also jumped, from a more typical range of $5 million to $10 million per fund to $13 million per 2012 vintage fund and $21 million per 2013 vintage fund.
The returns generated by the portfolio come with a big caveat, given how young the portfolio is. Some 49 funds are vintage 2010 or younger and very much in their J-curve phase, a period in which management fees act as a drag on results. Hamilton Lane in its report puts the total value multiple as of year-end at 1.4x and the net IRR at 8.7 percent. A separate March 31 report by the Bank of New York Mellon Corp puts the one-year return of the Hamilton Lane portfolio at 22.8 percent; three-year annualized return at 16.3 percent; and five-year annualized return at 11.1 percent; all three trail the benchmark Russell 3000 plus 3.5 percentage points, according to the report.
And the three best-performing funds in the portfolio? Not counting secondary interests, the honors belong to the 2005 vintage growth equity fund JMI Equity Fund V LP, with a 4.8x investment multiple as of year-end, the 2001 vintage buyout fund CVC European Equity Partners III LP, with a 2.9x investment multiple, and the 2001 vintage buyout fund GTCR Fund VII-A LP, with a 2.8x investment multiple.
That a trip to Hawaii isn’t necessary to pitch funds will no doubt disappoint some looking to take an exotic business trip. Still, Honolulu-based Chattergy said that “if someone comes out here, we almost always take a meeting with people that are in town.” The retirement system has also invited its fund managers to attend symposiums and investment summits in Hawaii each year to help educate the board of trustees about the portfolio.
And if you happen to work for a sponsor of one of the state’s top-performing funds, you may want to travel there just to take a victory lap.
(Update: The original story has been updated with information from an interview with Vijoy Chattergy, CIO of the Hawaii retirement fund.)
(Correction: Hamilton Lane was hired by the Hawaii retirement system in April 2013 and given discretion over the main private equity portfolio at the beginning of this year. The original version of this article said Hamilton Lane managed the program since April 2013.)