Return to search

LP Profile: Indiana Seeks Out New Relationships

Name: Terren Magid

Role: Executive Director of the Indiana Public Employees’ Retirement Fund since 2007

Total Pension Fund Assets: $14.2 billion, as of Dec. 31, 2009

Private Equity Target Allocation: 10 percent

Actual Private Equity Allocation: 6.6 percent, or $860 million, as of Sept. 30, 2009

Many cash-strapped limited partners are focusing exclusively on re-upping with their long-term general partners. Not Indiana Public Employees’ Retirement Fund.

The $14.2 billion pension fund is seeking out new relationships to help diversify its manager base by industry, geography and vintage year. And general partners, be forewarned: Indiana listens carefully to what your LPs are saying about you and responds accordingly.

“As the year progresses, we’ll look more toward re-ups than new relationships, but we still have some room to grow on the new relationship side this year,” said Terren Magid, executive director, who noted that the LP intends to commit roughly $500 million to private equity in 2010. Last year, when so many investors said they were only committing to known quantities, half of Indiana’s pledges went to new relationships. Among them, the state committed $50 million to White Deer Energy, a New York and Houston-based private equity firm with a goal of $750 million for its debut fund. The firm plans to invest in mid-sized oil and gas exploration and production companies, energy infrastructure and companies that service the oil and gas industry.

No particular sub-sector of private equity is getting a laser-like focus from Indiana Public Employees’ this year, but Magid plans to pay particular attention to opportunities in Europe and Asia. The goal for the program, which is now divided 65-35 U.S. versus non-U.S. funds, is to get closer to 50-50. “It’s critical for us to actually meet, greet and see the operations of all the funds we’re getting into. So we make sure that we get out there at least once in the due diligence process, wherever they are,” said Magid. Prospective GPs are also expected to come to Indiana for a visit. On an ongoing basis, the LP tries to meet face-to-face twice a year with each GP, which is not easy when dealing with an international fund.

Indiana Public Employees’ mostly tends to steer clear of mega-funds, said Magid, although it did commit $40 million to Hellman & Friedman Capital Partners VII, which closed last fall with $8.8 billion. “But by and large, we look to the middle market—that’s our sweet spot,” he noted. In the middle market, the pension leans toward managers who understand that value is created by making a business more efficient or by doing roll-up strategies, rather than by doing purely financial transactions. “That’s my personal bias, and I think the portfolio reflects that bias,” said Magid.

The LP does not have any hard and fast definition of middle market. But Magid said that a ballpark estimate of a fund size of roughly $500 million to $3 billion was not out of line. One example of such a pledge made last year was Indiana’s $40 million commitment to Falcon Investment Advisors’s mezzanine fund, Falcon Strategic Partners III LP, which closed with $729 million of capital. The firm invests in subordinated debt and equity in mid-sized companies to support their acquisitions, recapitalizations, buyouts and organic growth initiatives. Other mid-market firms in the Indian Public Employees’ portfolio include Ares Capital, New Mountain Capital, Silver Lake Partners, Towerbrook Capital Partners and Wayzata Investment Partners.

Program History

Indiana Public Employees’ is a relative newbie to the asset class. Until 1996, the pension fund was only allowed to commit to fixed-income investments. It now has a private equity target allocation of 10 percent and an actual allocation of 6.6 percent, or $860 million, as of Sept. 30, 2009. The private equity program began with some “dabbling,” in 2002, said Magid, then really began in earnest in 2006.

The $860 million already committed represents 45 relationships in 68 funds (see table for a selection of those relationships). About $500 million will likely be committed to private equity this year, representing eight to 12 pledges of about $40 million to $75 million each, although the pension fund’s commitments can range from $15 million to $125 million. Two years ago the LP committed $800 million, which went to about 20 pledges, and in 2009, $500 million went to about 15 vehicles.

In 2008, the board delegated investment management decisions to staff, so, unlike many pension funds, specific manager decisions are not signed off on by the board, except for potential pledges of more than $100 million. “Our delegated authority allows us to move somewhat more nimbly than those pension funds that have to wait for a board meeting for an approval,” said Magid, thus making Indiana a preferred partner for a lot of GPs, he believes.

The LP does not sit around waiting for firms to approach them. Instead Indiana Public Employees’ takes a highly pro-active approach, learning about GPs through a variety of sources, including other LPs. The pension fund has used San Francisco-based Strategic Investment Solutions Inc., known as SIS, as its non-discretionary private equity consultant for the past eight years. And SIS, of course, is helpful in identifying new managers for the program, but it is not the sole source.

The LP’s investment staff, which includes Greg Davis, the director of private equity, two analysts, and Chief Investment Officer Shawn Wischmeier spend a lot of time talking to their peers at other pension funds, going to conferences—“budget willing, to meet folks,” said Magid, who added that the National Association of State Investment Officers conferences are a great place to talk to CIOs. At events like that, there’s a fair amount of conversation regarding who’s getting commitments, and “the neat thing about being in the public sector,” said Magid, “is that there are no competitors, so there’s a lot of information shared between pension funds, and appropriately so, since that would be considered a best practice.” Wischmeier joined Indiana in 2006 as CIO to focus on diversifying the plan’s assets through the use of alternative investment strategies. Previously he was with Eli Lilly, where he focused on corporate investments, pension and benefit investments, and financial risk management.

Besides networking at conferences, “we pick up the phone and call people we respect in the industry,” said Magid, including peers, private equity managers, and consultants in other spaces. Davis worked in private equity at Bank of America before coming to Indiana roughly three years ago, so he has contacts from his prior career that can point him in the direction of interesting managers.

Altogether, Indiana Public Employees’ looks at between 300 and 400 firms each year in order to boil those down to 10 to 20 pledges. “We have a very robust process of diligence,” explained Magid, and “we treat SIS as an extension of our investment staff.” It’s not formal, but “they sort of sit on our investment committee,” along with the investment staff. They all participate in the due diligence process, and they all have to agree that it is something to go forward with. If either the consultant or the staff has a concern, they won’t do the deal.

So what can a manager expect when being considered by the state for a pledge? Once the pension fund decides it would like to learn more about a GP, staff reaches out to that firm to get information about it. Indiana Public Employees’ runs down a long checklist of items regarding a firm’s people, strategy, track record, risk, references, terms, fund size and fit, using an informal scoring system to decide if the team will make it to the next step. Over the course of the process there’s several conversations, and several meetings with the manager. When the pension fund decides it’s something it wants to pursue, staffers present the information they’ve gathered to Magid along with some idea of the size of the potential commitment. If he feels comfortable with it, the team then moves forward to the document preparation stage, which is handled by staff and attorneys.

A myriad of factors, however, could convince Indiana to take a pass on a firm. One of the biggest issues for Magid is whether the firm has good management processes and controls. Does the firm document what it’s doing very well? Does it follow a consistent approach to its investment thesis? The other big issue for Magid is how decisions get made at the firm. He wants to know if one person is making all the decisions, which would be worrisome, or whether decisions get made by several professionals. “The team evaluates the key-man risk very closely to determine if it’s worth getting into,” said Magid.

Early on in the private equity program’s history, Indiana Public Employees’ limited the scope of its program to top-quartile funds. But now, Magid said, the pension fund has “gotten more educated about the space.” His private equity team will “listen to the story if someone’s fund did not make top-quartile for a particular quarter or year, and then try to understand why that might be the case.” If the economic environment or one investment in a dozen dragged down returns in a particular quarter, “that won’t dissuade us from pursuing a fund,” he said. “But I have a bias. If I see something that’s not top-quartile, I’ll ask a lot of questions about it.”