Personality Profile: TIAA-CREF’s Schwartz Builds A Portfolio Of People

In the decade since she was tapped to build TIAA-CREF’s alternative investments group from scratch, Sheryl Schwartz has relied on a management style she adopted from her old boss. “He didn’t try to change people. He would assess your strengths and weaknesses and channel you into areas where you were strong,” she said.

It’s a technique she has applied in selecting general partners as well as her own staff. Under Schwartz’s watch, the financial services giant has staked out a sizable position on the private equity landscape. With more than $437 billion in assets under management and $10 billion committed to the asset class, TIAA-CREF is a coveted limited partner. And Schwartz has committed herself to building not only a varied portfolio, but also a diverse team of investment professionals. Not bad for someone who wasn’t even sure she wanted this job.

Schwartz joined TIAA-CREF in 1988, and has held five different jobs there, including stints in private debt placement and on the secondary trading desk. She was working in the asset-backed securities department when her boss at the time approached her about starting an alternative investments department. “He asked me to volunteer,” Schwartz remembered with a grin during a recent interview at her office. Schwartz remembers her former boss and mentor as having an outsize personality, at first intimidating but ultimately very inspiring. Schwartz didn’t leap at the opportunity, believing her talent was in analysis and negotiating deals, not picking investments. But she trusted her boss’s instincts, and launched the new venture in 1997 while still working on asset-backed securities. A year later, Schwartz asked if she could run the new department as a full-time job and hire a group dedicated to researching private equity funds.

TIAA-CREF, which stands for Teachers Insurance and Annuity Association-College Retirement Equities Fund, is a private company that invests retirement assets for professionals in the academic, medical, cultural and research fields. In 2007, roughly 500,000 retirees collected $10 billion in benefits. Overall, approximately 3.2 million people across 15,000 institutions invest with the company, and the investors decide how their assets are allocated by selecting from a menu of fund options.

Schwartz doesn’t like to invest in buyout firms simply as a matter of routine. As head of TIAA-CREF’s alternative investments division, she could probably commit capital on auto-pilot, by scouring lists of top-performing LBO funds and gaining easy access by dint of TIAA-CREF’s size. Instead, what she chooses to invest in is people. “The key aspect of this job is assessing people, as a kind of headhunter for investments,” Schwartz said. She prefers general partners with a team of buyout professionals that have worked together for some time, with a track record of deals and, more important, exits. She also goes with her gut.

While Schwartz declined to identify specific buyout shops, she said some GPs who secured commitments were those who had successfully run and grown companies in the past. “The ability to have both operating knowledge of an industry combined with financial acumen impresses us,” she said. Usually there’s a long runway before TIAA-CREF will hand capital to a new GP. The limited partner avoids first-time funds, preferring to invest in a firm’s third or fourth vehicle. Schwartz and her team put prospective GPs under a microscope. They look not only at a firm’s track record of buyouts, but also at fund managers’ careers prior to their forays into private equity. She and members of her team meet with buyout firms many times over several years before deciding to commit capital.

Schwartz’s face-to-face approach has resulted in a lot of travel for her and her team as they increase their portfolio’s exposure to international funds. In 2007, the LP’s buyouts investments were weighted half toward funds with a focus overseas, compared to an average of 40 percent. This year marked the first time TIAA-CREF backed country-specific funds, in Australia, India, Japan and Russia. The LP also committed to two pan-European funds, one pan-Eastern Europe fund and a pan-Asia vehicle. Last month, four TIAA-CREF GPs held overseas annual meetings on the same day: one in Australia, one in Japan, and two in Hong Kong—in the same hotel at the same time. Schwartz made sure to have an investment professional at each meeting.

Of the $10 billion total TIAA-CREF has committed to the asset class, $6 billion has already been drawn down by general partners, with the remaining $4 billion attached to unfunded commitments. On average, the LP commits to 25 funds per year, deploying roughly $1.5 billion to $2 billion annually. Between 50 percent and 75 percent of those commitments are to GPs with whom TIAA-CREF has already invested, leaving anywhere from $375 million to $1 billion for new relationships. TIAA-CREF’s slate of GPs reads like a who’s who list of the LBO world. The company has made commitments to at least 60 buyout funds, ranging from mega-market players such as The Blackstone Group, Carlyle Group, Cerberus Capital Management, Clayton Dubilier & Rice, TPG and Warburg Pincus, among others, to middle-market and small-market movers like Harvest Partners and Riverside Co. Schwartz has also guided commitments to firms that operate in the distressed debt and corporate turnaround arenas—Littlejohn & Co. and Oaktree Capital Management, for example—and to international funds, a practice that will likely continue in 2008.

TIAA-CREF does not set target allocations to specific asset classes, as is often the practice at pubic pension funds. Rather, the company invests opportunistically and responds to market conditions, Schwartz said. In 2007, that meant shifting the portfolio away from large buyout funds and committing to more small and mid-market operators. It also meant channeling approximately 30 percent of its commitments into distressed investing, which Schwartz defines as encompassing both distressed debt and operational turnarounds, compared to an average of 10 percent to 15 percent. Schwartz said it’s too early to say what investments will catch her team’s eye in 2008, but indicated that she’d like to get more exposure to energy and infrastructure funds.

In addition to having a diverse portfolio, Schwartz has assembled a diverse staff. Of the 10 investment professionals in the alternative assets department, nine are either women or minorities—a rarity in the homogeneous private equity world. While Schwartz is clearly pleased with the breadth of her team, the cultural and gender representation occurred organically. It was not a goal in itself.

“We look for the best candidates. It just so happened that the best candidates happened to be women and minorities, for the most part,” she explained. “The goal is to have a diverse team in the way we look at the world so that together we can make the best investment decisions.” She cited her group’s varied career background as a key to its strength.

In addition to those with private equity experience, TIAA-CREF’s alternative investments team has professionals with expertise in public bonds, high-yield debt, privately placed debt and infrastructure, as well as a lawyer, and one professional with a doctorate in immunology. While her team’s composition happened more by coincidence than by design, it’s a development that pleases Schwartz, who serves on the board of directors of WAVE, the Women’s Association of Venture and Equity, a group devoted to building the ranks of female professionals in the private equity industry.