Louisiana Teachers’ Reveals Credit Suisse Surprise

Teachers’ Retirement System of Louisiana saw the value of its private markets investments soar in the year ending March 31.

Still, it wasn’t enough to lift the private markets portfolio above a key performance benchmark over the long haul—a cautionary note for institutional investors looking to alternative investments to bail them out of growing liability gaps.

Also, a breakout of the bottom-five partnerships reveals notably poor performances by a $2.7 billion merchant banking fund sponsored by Credit Suisse and by a real estate fund co-sponsored by the firm that manages money for the financially pressured Wilpon family, co-owners of the New York Mets. In both cases I found a back-story suggesting neither investment is close to a washout.

According to a report prepared by adviser Hamilton Lane, the Louisiana Teachers’ program, which has reached $8.8 billion in commitments since its start in the mid-1990s, generated a 20.3 percent IRR for the year ending March 31. Credit just over $620 million in distributions and just over $540 million in unrealized gains as the portfolio rode the economic recovery and a strong exit market. (Hamilton Lane has had discretion over the program since 2008, and has worked to diversify the portfolio and smooth out the commitment pace, currently running at about $1 billion per year.)

The private markets portfolio, encompassing private equity, real assets, and debt investments, edged out a performance benchmark of S&P 500 plus 400 bps by 60 bps for the year ending March 31. Longer term, over the last 15 years, however, the 7.7 percent IRR generated by the portfolio remains 310 bps short of the same benchmark. At a 7.2 percent IRR the private equity portion of the portfolio, a buyout-heavy pool with $4.8 billion in commitments, also missed the same 15-year benchmark, in its case by 360 bps.

Like many mature private markets portfolios, that of Louisiana Teachers’ features both out-performers that have more than doubled the pension fund’s money, as well as laggards that have caused significant losses (see table, page TK). Among the most lucrative was a $100 million slug committed to Apollo Investment Fund V. The 2001 vintage buyout fund generated a 38.55 percent IRR and a multiple of 2.32x.

From the list of bottom performers two funds in particular jump out. One is the vintage 1998 Credit Suisse First Boston Equity Partners LP. According to the Hamilton Lane report, this $2.7 billion colossus ostensibly lost 75 percent of money invested, registering a -22.2 percent IRR and 0.25x investment multiple. A list of the fund’s investments from Thomson Reuters, publisher of Buyouts, reveals extensive exposure to communications and Internet deals, which would have been hit hard in the early 2000s.

Still, according to a source close to the fund, the story is not that simple.

After Credit Suisse acquired investment bank Donaldson Lufkin & Jenrette in mid-2000, it merged its own merchant banking team into that of DLJ. It also rolled over unspent capital from Credit Suisse First Boston Equity Partners into DLJ Merchant Banking Partners III.

Between a truncated investment period, management fee draws, and getting its start right before the dot-com bubble burst, the original Credit Suisse First Boston Equity Partners never got on track. On the other hand, DLJ Merchant Banking Partners III turned out to be a solid performer. As of December, backer Colorado Public Employees Retirement Association had it generating a 20.4 percent IRR. Investors consider the two funds to be “one investment experience and it was a very good one on a blended basis,” wrote our source in an email. A spokeswoman for Credit Suisse agreed with the basics of this account.

A second notable among the bottom five is Sterling American Property V, a vintage 2006 real estate fund to which the pension fund committed $50 million. As of March 31, the partnership had generated a -25.59 percent IRR and 0.41x investment multiple, according to the Hamilton Lane report.

The fund is co-sponsored by Sterling Equities, majority-owner of the New York Mets. Its co-founders, Saul B. Katz and Fred Wilpon, are defendants in a lawsuit by a trustee seeking to recover hundreds of millions of dollars from them on behalf of victims of the Bernard L. Madoff Ponzi scheme (see Feb. 14 Buyouts, page 48, for more detail).

Sterling Equities, which manages money for the Katz and Wilpon families, is the largest investor in Sterling American Property V. The $609 million pool, earmarked for investments in office buildings and multi-family properties, sailed right into the teeth of the 2008 financial crisis. The following year the firm lost its largest Fund V investment, when the office building at 333 Bush Street in San Francisco went into foreclosure following the bankruptcy of its anchor tenant.

But Sterling Equities reports that the fund has performed better than the Hamilton Lane report would suggest. In a formal statement printed below, Gregory P. Nero, Sterling Equities general counsel, wrote that the interim numbers in the Hamilton Lane report are not consistent with its year-end assessment of fair value of the remaining Fund V holdings. The firm projects that investors in the fund will recover at least 85 percent of their money.

Statement by Gregory P. Nero, Sterling Equities General Counsel:

“The returns reported by TRSL are not consistent with what we believe is the fair market value of the assets of Sterling American Property V or what we have reported to our investors is the fair market value of such assets. We believe they are calculating their returns based upon the audit financials, which are reported on a cost basis, not a value basis. [Sterling Equities is a fully integrated real estate operating company with almost 40 years of experience. Since 1991, it has invested in real estate primarily through its Sterling American Property funds, where it has invested in 161 investments, valued at over $4.4 billion.] The net IRR of the first 4 Sterling American Property funds range from high single digit returns to high teen returns, in-line with the risk profile of the investments. While the projected returns for the 2006 Sterling American Property V fund are not expected be in line with those of the prior Sterling American Property funds, given the economic environment of 2008-2010, Sterling Equities continues to believe that the returns for its 5th fund will be respectable and are currently projecting to return in excess of 85% of their investors’ capital investment.”