Thompson Guides NYC Pensions From “Blah” To Diversified

It’s a rare political candidate who talks private equity in his stump speech. But during his bid for the New York City comptroller’s office in 2001, William Thompson Jr., did just that, stressing the need to devote more money to the asset class as a way to diversify the city’s investment portfolio. Thompson, who also promised to be a more “activist” comptroller, began working toward his diversification goal almost immediately upon taking office by pushing to raise the city’s allocation to private equity.

As the chief financial officer for New York City, the comptroller is charged with advising the mayor and City Council on Gotham’s financial health, supervising city programs and auditing its agencies. The office also oversees the New York City Retirement Systems, the roughly $110 billion common pension fund that includes New York City Employees’ Retirement System (NYCERS), Teachers’ Retirement System of the City of New York, New York City Police Pension Fund, New York City Fire Pension Fund and Board of Education Retirement System of the City of New York. The comptroller sits on four of the five boards.

For buyout firms, Thompson’s arrival at One Centre Street in Manhattan opened the vault on a fresh source of capital. Given the pension fund’s size, even a modest increase in target allocation meant freeing up hundreds of millions of dollars for LBO firms. Thompson naturally thought the city would benefit as well. “It is in our best interests to put our money there,” he said during a recent sit-down interview with Buyouts, noting that the returns provided by top-tier managers are often impressive.

In fact, Thompson said some of the private equity funds the city has invested in have returned “in excess of 40 percent,” although the average is between 15 percent and 20 percent. “The return in a very short time has been very good. And I think private equity overall has performed well for us as an asset class,” Thompson said. The city’s average commitment to a buyout fund runs between $100 million and $150 million.

When Thompson took office, the target for private equity was two percent, and his predecessor had guided roughly $500 million toward the asset class. “Five hundred million,” said Thompson, with eyebrows raised. “Out of $80 billion?” Thompson was concerned that a few consecutive years of an underperforming stock market would more severely damage the city’s pension funds than other public funds, particularly the New York State Common Retirement Fund, which he felt was more insulated from downturns through diversification. NYS Common Retirement fund, with roughly $150 billion in assets, has a 9 percent target allocation to private equity and more than $10 billion invested in the asset class.

Boosting Allocation

On Dec. 31, 2001, the day before the newly elected city comptroller took office, the city had primarily a stocks-and-bonds portfolio, with its pension funds weighted roughly 70 percent in stocks and 30 percent in bonds, Thompson said. “And a lot of that 70 percent was stock market, domestic equity. It’s just kind of,” Thompson shrugs his shoulders and sighs as if to say, “blah.” When the stock market went up New York City looked good, but when it went down, he added, the city looked really bad. “I wasn’t trying to undercut the previous comptroller,” Thompson said, referring to Alan Hevesi, who served two terms in the job and went on to become New York state comptroller, a position he resigned from amid scandal in late 2006. “I just thought it made more sense … to have a more balanced portfolio perspective, and we’ve tried to do that.”

During the past five and a half years, Thompson has worked with the five sets of pension fund trustees, along with PCG Asset Management, the city’s private equity advisor, to boost commitment to buyout funds, along with some venture capital and mezzanine investments. By mid-2003, the trustees had approved a private equity target allocation of five percent across the city’s five pensions, although individual funds may earmark a bit more or less.

Since then, Thompson has helped steer a total of between $1 billion and $1.5 billion annually to private equity. The city invests roughly 60 percent of the allocation in buyout funds, 30 percent in venture capital vehicles and 10 percent in mezzanine funds. Apollo Management, The Carlyle Group, Lehman Brothers Merchant Banking and Palladium Equity Partners are among the buyout shops to which the Big Apple has committed. Other target allocations include 5 percent to real estate and 2 percent to treasury-protected securities. Today, the city has investments with 42 general partners, compared with just seven when Thompson took office.

In June 2005, lawmakers in Albany hiked from 15 percent to 25 percent the portion of public pension funds that can be invested in alternative investments, but Thompson has no plans to seek an allocation increase before term limits force him from office in 2009. “It’s going to take us at least another three to four years to hit five percent. We’ll start to get money back in some places and see how well we’ve done,” Thompson said.

While the comptroller is clearly a fan of private equity, he also understands its volatility and sees value in advancing at a reasonable pace, a view shared by another city leader. When asked in May about boosting the city pension funds’ performance, Mayor Michael Bloomberg told The New York Sun, “There are plenty of hedge funds and LBO firms that give returns of 20 percent, but their returns are very variable and they have risk of actually losing significant amounts of money.”

“A Leadership Job”

Before running for comptroller, Thompson served five consecutive terms as president of the city Board of Education, and served as a trustee on its retirement board. From 1985 to 1990, he served on the NYCERS board. In addition to public service, the comptroller has worked on Wall Street, serving as a senior vice president for public finance at investment bank George K. Baum & Co. in the early 1990s.

Even with his experience, Thompson has found it a challenge managing the city’s pension funds. Unlike other public pensions, where one individual makes investment decisions, each New York City fund is guided by its own set of trustees who vote on their fund’s target allocation levels and individual commitments. In the case of NYCERS, the city’s largest pension, trustees include Thompson, the city finance commissioner, a public advocate, the five borough presidents—who each have a fifth of one vote—and one representative each from the Transport Workers union, the Teamsters union and District Council 37, the municipal employees’ union.

All told, there are roughly 40 trustees across the five funds, and changing the city’s overall commitment to private equity required herding the group toward consensus. “It is a leadership job,” Thompson said. “And we’ve been collectively very successful. It just doesn’t happen in a second.” And boards don’t agree on everything. A few years ago, one of the boards raised an objection and declined to commit to a Carlyle Group fund, Thompson said, although he could not recall the specifics of the argument or which fund objected. He added that all the boards have committed to subsequent Carlyle Group funds.

On the bright side, helming one of the 10 largest public pension funds in the country affords Thompson use of the bully pulpit. Although his demeanor is more professorial than pugnacious, Thompson has authored shareholder resolutions on an array of issues. And in the realm of private equity he has also used a more direct approach. “If we see something, we’re not against picking up the phone and making them aware of our concerns. I’ve done it in the past,” the comptroller said, adding that he tries not to go too far. “If we start to squeeze and shake [buyout firms], in some ways they do have the right to come back and say, ‘You know what, the return is lower because you pushed us to do something.’”

Thompson likes companies his pension funds back to look at “the triple bottom line,” encompassing performance, worker well-being and environmental impact. In January, Thompson filed shareholder resolutions with five companies, including home retailer Bed, Bath & Beyond, urging them to ensure that overseas suppliers observe “basic human rights standards.” He also led a campaign pressuring companies not to do business with countries listed by the U.S. State Department as state sponsors of terrorism. Aon Corp., ConocoPhillips, Cameron, Foster Wheeler Ltd., General Electric Co. and Halliburton Co. all ceased doing business in Iran and Syria as a result of the effort, Thompson said.

Thompson also supports emerging managers. In 2004, he spearheaded a program to support firms that invest in small, first-time funds guided by black, Latino and women managers. Pension trustees approved a total commitment of $175 million to invest with such managers. Through the program the city has committed to Fairview Capital Partners LP, Fairview Capital Partners III LP, Levine Leichtman Capital Partners Deep Value Fund LP, Paladium Equity Partners III LP, Solera Partners LP and Yucaipa America Alliance Fund I LP.

A lifelong Brooklyn resident whose parents were a judge and a public school teacher, Thompson doesn’t seem inclined to leave public service anytime soon. Although he hasn’t formally declared his candidacy for mayor, his intentions are clear. He has raised $3.1 million so far, according to the July 31 disclosure listed on the city’s Campaign Finance Board Web site. “I’ve indicated that I have an interest in being mayor,” Thompson told Buyouts. “The city has been very good to me and it’s a way I could continue to serve.”

If elected, Thompson could still influence the city’s investment in private equity. The mayor sits as a trustee on the boards of the police and fire departments’ pension funds; the mayor also appoints other trustees, such as the police commissioner, fire commissioner, finance commissioner, schools chancellor and deputy schools chancellor.