Public pension systems have been hit hard this year by investment officer defections to the private sector.
In June, Rick Hayes, senior investment officer for alternative assets with the California Public Employees’ Retirement System (CalPERS), and Frank Fernandez, private equity investment chief with the Florida State Board of Administration, quit for greener pastures. The moves follow Kevin Kester’s recent defection from the top alternatives spot at the Colorado Public Employees’ Retirement Association (CoPERA), in favor of a private sector gig with The Broe Cos.
None of the defectors explicitly cited compensation as their motivation, but it’s a tough subject to avoid.
“When you’re at the table negotiating, sitting across the table from someone who makes 10 times more money than you, wouldn’t you want to get there eventually?” asked Adam Zoia, founder and managing partner of Glocap, a New York City-based executive search firm focused on the private equity industry.
In 2001, general partners at private equity firms managing at least $1 billion took home more than $1 million year, on average, according to the “2003 Investment Benchmarks Report” published by Glocap and Thomson Venture Economics (publisher of Buyouts). That figure includes an average salary of $676,000 and a bonus of $418,000. It does not doesn’t take into account the typical 20% carried interest the GP receives or the co-investments he or she makes. If the GP were at a successful firm, he or she would take home millions of dollars a year.
By contrast, David Mills, the new executive director for the State of Wisconsin Investment Board (SWIB), will receive an annual salary of $225,000. In his position, Mills oversees a $63.8 billion investment pool. His predecessor stepped down in December. Patricia Lipton had received $215,000 annually to lead a team of 104 staff members at SWIB.
“Compensation has always been a concern for every state pension,” said Mike McCauley, director of investment services and communications at Florida’s $120 billion state pension fund. “It’s not apples to apples. Compared with opportunities in the private sector, recruitment and retention have always been problems.”
When Hayes’ predecessor, Barry Gonders, left CalPERS in 2001 to join Grove Street Advisors, he acknowledged that money was a motivating factor.
California’s pension funds confronted the issue head on last year. After much internal debate, the state’s two largest pension funds pushed a bill through the state legislature that brought compensation for its portfolio managers closer to the industry standard. Before, state investment officers were compensated at a rate similar to that of all civil servants.
“It’s like a food chain,” says one New York-based analyst who monitors salaries in the private equity industry. “If you’re good, you’re always being recruited up in the food chain.”
To be recruited does not translate into a new job description for public fund managers. Portfolio managers at public pension funds are not being recruited to scout deals, perform due diligence or sit on company boards. They’re being recruited to sift through fund prospectuses to build a fund-of-funds or leverage their relationships to raise money from public pension funds.
Florida’s Fernandez left his job as a senior portfolio manager to join Alignment Capital, an Austin-based private equity consultancy that was founded by a pair of former investors with the University of Texas Investment Management Co. (UTIMCO). The firm soon hopes to raise a $300 million inaugural fund-of-funds. Like Fernandez, CalPERS’ Hayes will set up a fund-of-funds business for Oak Hill Partners, a 20-year investment group that manages $10 billion of Robert Bass’ oil fortune.
And it isn’t just public pension funds. Mark Yuskow, president and chief executive of the University of North Carolina’s $1 billion endowment system, announced his resignation in April. He is expected to resurface on the private side later this month.
Once an experienced professional leaves, public institutions often are limited to pools of internal talent when looking for a replacement.
CalPERS, for example, last week said that six-year CalPERS veteran Leon Shahinian will replace Rick Hayes. Florida, Wisconsin and Colorado also went local, naming Jim Treanor, Mills and Chris Reilly, respectively.