New Mexico ERB eyes sector-focused funds and new managers

  • Assets under Management : $12.8 bln
  • PE actual allocation: 12.4 pct
  • Why this is important: LPs are willing to invest in first time managers who have sector expertise

New Mexico Educational Retirement Board is unafraid to take the plunge into first-time funds and new strategies.

“Investing in new funds helps us build a reserve of goodwill,” said Steve Neel, deputy chief investment officer at New Mexico ERB.

The $12.8 billion New Mexico ERB has a three-pronged private equity strategy, Neel said.

It invests directly in private equity funds and makes co-investments with its fund managers. It also has discretion to commit to secondary partnerships in vintage funds with existing GPs.

New Mexico ERB recently re-upped $60 million to AE Industrials’ second fund with an additional $10 million for secondary partnerships. Earlier, the pension fund committed $50 million to AE Industrial’s $680 million debut fund in 2015. It also made three co-investments in Fund I portfolio companies, pension documents said.

Fund I returned an IRR of more than 30 percent for New Mexico ERB, pension documents show.

David and Brian Rowe founded AE Industrial in 1998 to invest in middle market aerospace companies to help them grow and create value.

“AE Industrial has unmatched access to this segment of the market, and great credibility,” Neel said. sai

Likewise, New Mexico ERB committed $30 million to Tenex Capital Partners’ first fund that closed at $452 million in 2011. It also co-invested in JET Industries, a portfolio company, and got a seat on the Tenex advisory board.

“In its second fund, we got a full bite of the apple,” Neel said. New Mexico ERB committed $50 million to Tenex Capital’s second fund.

Tenex’s first fund returned an IRR of more than 19.16 percent for New Mexico ERB, documents showed.

Tenex was founded by Michael Green, Varun Bedi, JP Bretl, Joe Cottone, and Chad Spooner. Before founding Tenex, all of them worked together at Cerebrus Capital Management; Green, Cottone and Spooner previously worked at GE, and Bedi and Bretl worked at McKinsey & Company.

“Cerebrus, McKinsey and GE. The partners were a great mix of sector and investment experience,” Neel said.

In the secondaries world, New Mexico ERB likes to invest with secondary funds that are focused on market inefficiencies. These include funds from Industry Ventures, Lexington Partners and W Capital.

New Mexico ERB made a $50 million commitment to a new strategy from Siguler Guff for its debut secondary opportunities fund in 2015. It re-upped $20 million in Siguler’s sophomore secondary opportunities fund in 2016.

“They have deep domain expertise in the distressed and special situations sub-strategies,” Neel said.

Both the Siguler Guff funds have generated IRRs of more than 40 percent, pension documents showed.

New Mexico ERB also picks up secondaries in select portfolio companies that are poised for a big event or change, Neel said.

The company may be ready for an IPO, or there is potential for revenue ramp-up, Neel said.

The pension fund purchases founder shares or takes LP positions in such companies, he said.

“We also try to go beyond the ordinary and become solution providers and advisors to our GPs,” Neel said.

New Mexico’s private equity portfolio was $1.58 billion and 12.4 percent actual allocation against target of 13 percent as of March 31,2018.  It returned 12.2 percent over one year, 12.5 percent over 3 years, and 14.2 percent over 5 years to date.

Action Item: Read more on New Mexico’s PE investments here

photo courtesy Sandia Mountains in New Mexico. ivanastar/E+/Getty