SF pension backs major Asia-focused firm, bets on tech via PE and venture funds

  • AUM: $24 bln
  • Target allocation to PE: 18 pct
  • Actual allocation to PE: 17.1 pct
  • Why this is important: San Francisco has made several commitments to non-U.S. funds this year

San Francisco Employees’ Retirement System committed $185 million to Hillhouse Capital, DCM Ventures and K1 Investment Management.

The commitments were disclosed in an investment report presented at the system’s Aug. 8 board meeting.

The $24 billion San Francisco pension system committed $100 million to Hillhouse’s fourth fund. The firm focuses on consumer, TMT, industrials and healthcare and invests in companies across all equity stages.

It was founded in 2005 by Lei Zhang, who worked at the Yale endowment under David Swensen. Yale was one of Zhang’s first backers and seeded $20 million in capital for Hillhouse.

Hillhouse’s portfolio includes Tencent, Airbnb and Grab.

Texas County & District Retirement System also backed Hillhouse IV, committing $85 million.

The Hillhouse fund is expected to be larger than KKR’s Asia fund, which raised $9.3 billion in commitments last year, the Financial Times reported.

San Francisco committed $35 million to DCM Ventures’ ninth fund, which is expected to raise $750 million, according to a Form D filing.

The venture firm backs seed-, early- and mid-stage startups in communications and infrastructure, components, internet and digital media, social and gaming, and software. It has offices in Silicon Valley, Beijing and Tokyo.

DCM’s eighth fund raised $500 million in commitments in 2016.

And San Francisco committed $50 million to K1’s fourth fund, which is targeting $1.5 billion, according to its Form D. This is a new relationship for the pension system.

K1 focuses on lower-middle-market software companies with enterprise values of up to $200 million.

Pennsylvania Public School Employees’ Retirement System also committed $100 million to the fund, which is expected to make 10 to 16 investments in B2B enterprise-software companies.

Each of the firm’s previous funds generated top-quartile returns for their respective vintages, according to a PSERS staff memo. K1 netted an aggregate 27.8 percent internal rate of return across its previous funds as of Sept. 30, 2017.

San Francisco in May committed $75 million to new funds from BGH Capital and SoftBank. Last year it committed 50 million euros ($57.7 million) to Nordic Capital’s ninth flagship buyout fund for investments in middle-market businesses throughout Europe and North America.

San Francisco’s $4.2 billion private equity portfolio has a 17.1 percent actual allocation on an 18 percent target. The PE portfolio returned 10.04 percent, the highest return among all asset classes for the seven months ended July 31, 2018.

Action Item: Read more about the pension plan here https://bit.ly/2M99k5G