Not many titans of private equity decide to turn the tables and manage pension funds. The pay, relatively speaking, is low. And at government-operated pensions, there are lots of workers and politicians watching your every move. But Larry Schloss, who co-founded Diamond Castle and before that led DLJ’s merchant banking division, decided that the opportunity to run the Big Apple’s $118 billion pension fund (which includes $7.5 billion in private equity) was just too good to pass up. Now that the native New Yorker has been chief investment officer for more than a year, Gregory Roth of Buyouts decided to catch up with him for a progress report.
A year ago, when you became chief investment officer for New York City’s pension funds, you said this was one of the best jobs in New York. Is that still true?
Actually now I think it’s one of the best jobs in the country. First of all, it’s $118 billion, so that brings a lot of challenges to it. And it’s all the asset classes as opposed to just private equity. And because it’s the fifth largest pension fund in the country, I meet all of the top managers from the different asset classes. People at the fund are very, very willing to listen to new ideas, because. The pension fund went down to $77 billion (in the crisis), which doesn’t work at all. The good news is that it’s now rebounded past where it was before the market crash. What I want to do is have a lot of impact and do the best job possible for the pensioners. It’s very meaningful work.
What are you most proud of in your year as CIO?
What I’m most proud of is that the pension fund has increased in value by about $18 billion. On the other hand, I’m not going to confuse a bull market and brains. I’ve been around long enough.
Pensions are in the news a lot these days. Do you feel more pressure to outperform?
When I was a private equity guy, I raised money from probably 20 public pension funds. So, I’m used to working for public pension funds as a money manager, but I never really understood the whole pie. Now, I understand the whole pie, and I understand the long-term need for performance.
What keeps you up at night?
I sleep great. I’m exhausted when I come home. I get in every morning at about 7:45, and I typically end the day with a dinner with a money manager. By the way, I pay for my own dinner, just to be clear.
What I most worry about right now is Northern Africa and the Middle East. We have all this capital. It’s fully invested. The pension fund made 14 percent last calendar year. So, I worry about keeping that. If you have all this turmoil, something has to go wrong. You just can’t have this many countries changing governments without something potentially happening. And if it happens, I need to make sure that we’re in a position to preserve our capital.
How much do you plan to commit to private equity this year?
Well, to keep a $12 billion portfolio reasonably static, it’s about $1.5 billion to $2 billion, plus or minus. We haven’t decided on numbers yet, but that’s what I call a normal year. We’re also going through asset allocation, and the asset allocation on average has 5 percent to 6 percent in private equity.
What areas of private equity do you see as most promising?
I like the middle market and large buyout funds in the United States and in Europe. We’re under-allocated in Europe. So we need to put some capital there over some number of years with top-quartile European funds to balance our fund a little bit. We have probably a little too much in venture capital, so we’re reviewing how it fits in our portfolio. I think we like growth capital, as opposed to pure venture, which is an expanded universe. Again, we tend to put commitments out by the hundreds of millions of dollars, and the best venture capital funds are smaller funds and they’re just impossible to get into.
You once said you were a GP’s worst meeting. Are you tough to convince?
No. I’m really easy to convince. I think now is a real easy time to figure out who’s very, very good, and who’s not very good, because the recession just came. The best of the best are clearly floating to the top. The people who are having trouble are clearly having trouble. There are two comments I will make about fundraising. One is that people still talk about gross returns, and I don’t quite know why, because investors only get net returns. So why have gross returns, other than to puff up the numbers? So, that doesn’t go over very well.
And second, people always want to talk about their war stories, about why this company’s good, and I have never heard anyone tell us why they made a bad investment. Which, again, is not surprising. But after a while, all the good stories all blur together. What you’re always trying to figure out is: what’s the secret sauce, what’s the differentiating factor. So, like all public funds, what we really need from private equity is the return. We’re desperately in search of double-digit returns—net.
Can you shed some light on your screening process?
We have a lot of funds that are re-ups. So we have to figure out who we want to re-up with. There’s a variety of funds that Barry Miller, the fund’s private equity manager, and I have spoken about that we’re not in that are clearly top-quartile funds that we need to get into. So we’re working through an approach that sort of lays out those funds, as well as how much capital we should put into funds that we’re not already in, what that means for the funds that we are in, who’s not going to get capital, and should we examine potentially selling some of the funds that we have to make room for funds that we’re not in.
You said earlier this year you planned to reduce the number of GP relationships. Is that still your plan?
Long term, we plan to reduce the number, but it doesn’t happen overnight. One of the problems of having too many funds is that you have too little money with funds. So, our typical bite size in the past had been $100 million, and the right bite size might be $200 million or $250 million. So that will force us to have less funds that we invest in.
What is the most important thing GPs can do to get your attention and help invest NYC pension money?
We’re like any big LP. We want as predictable a return as we can have. We want open communication. We don’t want to waste your time. We don’t want you to waste our time. We want things served up as simple as possible for a complicated asset class. And we want to be treated like real partners. I have been a little bit amazed, now that I’m on the other side, that some GPs have treated some of the LPs a little rough around the edges. And I think that ILPA, in particular, is working on that and trying to get the balance right between institutional investors and the general partners. I’m optimistic that will sort itself out.
Now that you’ve been in this role for a year, how do you look back on your experiences at Diamond Castle, the private equity firm you co-founded in 2004?
Well, this job found me. It was interesting being an entrepreneur in private equity, having been one of the builders of DLJ’s merchant banking business. At one point it was the world’s biggest, and then we started this smaller private equity firm. And now I’m over here. It almost seems like a natural progression. But it wasn’t by design, because I got the call in November, 2009, asking if I want to do this. It was like the greatest honor you can bestow upon a New Yorker. I thought this was awesome. So, I’m sort of looking forward as opposed to looking backward.
Do you recommend others in private equity to pursue public service?
I go to conferences and everyone says that we’re really glad that you’re doing it. Thanks, you know. Good luck. But I am surprised that no one else has volunteered to join me. And if I look around the country, there just aren’t that many private equity guys that have aligned themselves with big public pension funds. I think it’s an awesome experience. I think everyone should try it, just because it’s such a great challenge. And if I had a wish, I’d wish that more private equity guys would come join me here in the city of New York. I could use the help.
Edited for clarity