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Private Equity and Real Estate Investment Manager Recommendations for the Retirement Plan and Endowment Fund

Private Equity and Real Estate Investment Manager Recommendations for the Retirement Plan and Endowment Fund. University of Missouri System Board of Curators June 10, 2010 FINANCE COMMITTEE. b. Asset Allocation Targets. c. Private Equity & Real Estate Selection Process.

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Private Equity and Real Estate Investment Manager Recommendations for the Retirement Plan and Endowment Fund

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  1. Private Equity and Real Estate Investment Manager Recommendations for the Retirement Plan and Endowment Fund University of Missouri System Board of Curators June 10, 2010 FINANCE COMMITTEE b

  2. Asset Allocation Targets c

  3. Private Equity & Real Estate Selection Process • Rocaton (investment consultant) utilizes databases and interviews to develop a short list of potential managers • “Best in Class” managers are identified in a thorough vetting process • Additional screen for Missouri based firms and minority owned firms • On site visits and analysis are performed for each manager • Performance, management, portfolio design and other factors are monitored on an ongoing basis • Out of the “ Best in Class ”, several are selected for interviews with System staff and Rocaton, based on agreed upon criteria, portfolio fit and available funding d

  4. Private Equity Portfolio • Investment began in 2004 • Investments are made incrementally in order to diversify the portfolio by type and year and are impacted by what is actually available in the market from year to year • Investments slowed in 2008 and 2009 due to unfavorable market conditions • Market conditions have improved significantly and new opportunities are attractive • Current allocations (market values) are approximately 2.5%, below our target of 5% in each portfolio • Total commitments of about $60 million annually should result in reaching the 5% allocation by 2015 e

  5. Private Equity Portfolio Profile 5 f

  6. Recommended Firms - Lehman • J.F. Lehman Equity Investors III – $400 million Target • Lehman was founded in 1992 by John F. Lehman, former Secretary of the US Navy and Donald Glickman. • J.F. Lehman has an exclusive focus on lower middle market companies in the U.S. and U.K. in the Defense, Aerospace, and Maritime industries. • UM is an investor in Fund II, a $335 million fund which closed in November 2006. • To date three investments have been fully or partially realized, generating cash distributions of over 90% of drawn capital to investors. • The fund has generated an estimated 24% IRR since inception (as of 3/31/10). g

  7. Recommended Firms - Sheridan • Sheridan Production Partners II – $1.3 Billion Target • Seeded by Warburg Pincus – Fund I closed 2007 • Lower risk energy strategy • Acquire a diverse portfolio of U.S. mature, predictable oil and gas producing properties, mostly from public companies who have historically underinvested in declining production assets • Sheridan hedges energy prices to protect return of capital • All land based production – no offshore wells • Fund I – despite short history has a 27% internal rate of return • Management team is well respected with many years of exploration and production experience h

  8. Recommended Firms - Vestar • Vestar Capital Partners Fund VI –$3.5 billion Target • Large buyout firm formed in 1988 from The First Boston Corp. • Key areas include financial services, consumer products, diversified industries, healthcare, and international (Europe) • Has formed five funds, all with positive returns • Partners with middle market companies to improve base business • Examples – Birds Eye Foods, Sun Products, Press Ganey • Generally a long term strategy with over a 10 year cycle for funds • UM invested in Vestar V – a $3.7 billion fund closed in 2005 • Still growing investments but returns through March 2010 show a 1.2X multiple of investment and an Internal Rate of Return of 9% i

  9. Recommended Firms - Newbury • Newbury Equity Partners II –$800 Million Target • Strategy of investing in secondary offerings from investors needing liquidity or with a change in strategy • Target market is small secondary offerings of $1 - $25 million • Illiquidity and non economic factors result in attractive pricing • Management team has experience from 1993 in secondaries • Investments are generally in funds that are +/- 75% drawn resulting in more quantifiable value and quicker payback • Fund I is two years old and has a multiple of investment of 1.2X and a net Internal Rate of Return of 12.1% • Fund I almost fully drawn, with funds being returned • Fund II - $650 million already committed with the balance expected this summer j

  10. Real Estate Portfolio • Investment in real estate began in 1997 • Previous real estate investments (RREEF and TA Realty) have provided a stable income stream, but the recent downturn in real estate prices has hurt market valuations • Current valuations provide for continued stable income with more potential upside valuations • Market conditions have improved significantly and new opportunities are attractive • Current allocations (market values) are approximately 4.5% (Ret) and 3.3% (End) below targets of 6% and 7.5% respectively • Total commitments of about $80 million should result in reaching the target allocations in the next several years k

  11. Real Estate Risk/Return Profile l

  12. Recommended Firms – Angelo Gordon • AG Core Plus Fund III - $800 Million Target • Management team in place since 1988 • Seeks high quality properties with some “issues” and upside potential • Less risky strategy with expected net returns of 12%, half coming from current income • Management slowed investments in Fund II during 2007 and 2008 due to very high valuations and is now investing • Fund I showed net Internal Rate of Return of 18% and a multiple on investment of 1.6X m

  13. Recommended Firms – Blackstone • Special Situations Fund II- $2 Billion Target • Large successful firm formed in 1985 with expertise in a variety of capital formation strategies including real estate • $14B market cap and $1.4 billion in cash reserves • This fund seeks to capitalize on loans/debt of troubled properties due to capital structure, not real estate fundamentals • Large capital base allows the ability to consummate deals quickly • Fund I closed in 2008 and has an IRR of 17.6% • Fund II has already accepted investments and is operating n

  14. Summary RecommendationsCommitments in $Millions Private Equity RetirementEndowment • J.H. Lehman III$10.0 $5.0 • Vestar VI $10.0 $5.0 • Sheridan II $10.0 $5.0 • Newbury II $10.0 $5.0 Total - $60 million $40.0 $20.0 Real Estate • Angelo Gordon $20.0 $20.0 • Blackstone II $20.0 $20.0 Total - $80 million $40.0 $40.0 o

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