Virginia weighs broad separate accounts mandate

“I’m kind of intrigued by the strategic partnership concept,” he said.

Schmitz joined Virginia Retirement System in 2011 after eight years as CIO of the Oregon State Treasury, where he had helped manage the Oregon Public Employees Retirement Fund’s long-held relationships with Kohlberg Kravis Roberts & Co and TPG Capital. Those relationships generated strong returns with favorable economics, Schmitz said, referring to the fees investors pay private equity fund managers.

Schmitz would like Virginia’s $66.0 billion retirement system to develop similar relationships with broader mandates, he said. In recent years, several of the private equity industry’s most prominent investors have created separate accounts through their longtime fund managers, often garnering favorable terms in exchange for larger commitments. Accounts belonging to the California Public Employees’ Retirement System, New Jersey Division of Investment and the Teacher Retirement System of Texas, among others, often feature strategic mandates that allow for investments outside the realm of conventional buyout funds.

“We’ve tended to do smaller bite sizes here (at VRS). Even though we have a large portfolio, we haven’t pursued that, per se,” he said. “If you look at the larger firms that have multiple structures, real estate, etc.,…it may make sense to look at some open mandate relationships.”

Virginia likely would pursue a similar account structure, though it likely would be much smaller than the $1 billion-plus accounts formed by New Jersey Division of Investment and Teacher Retirement System of Texas. Ideally, the retirement system would commit $250 million to $300 million to its separate account, Schmitz said. “But in order to get meaningful conversations with the general partners, we’d have to talk around $500 million.”

Schmitz also said that Virginia Retirement System may consider an evergreen account structure that would allow the manager to re-invest capital. “If you really have a good, open dialogue with a lot of the GPs out there, I think they’ll say that’s where it’s headed,” he said.

Virginia Retirement System has become more active as a private equity investor over the last year, having increased its target allocation to 12 percent in 2013 from 9 percent previously, Schmitz said. The retirement system tends to focus its commitments around re-ups with its existing managers, typically adding only one or two new relationships each year, Schmitz said.

The retirement system closed more than $1.2 billion in private equity commitments between April and July, a total that included several commitments to firms specializing in distressed and turnaround strategies.

The bulk of those commitments, $800 million, went to a pair of separate account funds of funds managed by Grosvenor Capital Management and Asia Alternatives. The $600 million account with Grosvenor will invest in small and emerging managers. The $200 million commitment to Asia Alternatives will invest in Asian private equity funds.

The $5.1 billion private equity portfolio had generated a 10-year return of 14.6 percent as of June 30, according to documents available through its website.

“It’s a nose to the grindstone approach,” Schmitz said. “We’re really happy with our performance relative to the market and relative to our peers.”