December 11, 2012
Interviewed by: David Snow
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Barry Miller of NYC’s Pension Fund: Secrets to GP Success

One of the largest limited partners in the world had a challenge – its private equity portfolio was “just too diversified,” according to Barry Miller, Head of Private Equity, New York City Employees’ Retirement System. Under Miller’s leadership, the pension fund tapped the secondary market and began a strategy of paring GP relationships in order to position its portfolio for future out-performance.

Privcap’s interview with Miller is essential viewing for anyone wishing to get inside the mind of a new breed of sophisticated private capital allocators. Topics discussed include: what Miller looks for in a GP team, why the ability to return capital is at a premium, the stark difference between manager selection in the buyout versus the venture markets, why failure to return LP phone calls may impair your next fund raise, the aftermath of the “over-commitment” strategy, and why Miller firmly believes that the ability of investors to meet actuarial assumptions will rest on putting “a significant amount of your capital into private equity.”

One of the largest limited partners in the world had a challenge – its private equity portfolio was “just too diversified,” according to Barry Miller, Head of Private Equity, New York City Employees’ Retirement System. Under Miller’s leadership, the pension fund tapped the secondary market and began a strategy of paring GP relationships in order to position its portfolio for future out-performance.

Privcap’s interview with Miller is essential viewing for anyone wishing to get inside the mind of a new breed of sophisticated private capital allocators. Topics discussed include: what Miller looks for in a GP team, why the ability to return capital is at a premium, the stark difference between manager selection in the buyout versus the venture markets, why failure to return LP phone calls may impair your next fund raise, the aftermath of the “over-commitment” strategy, and why Miller firmly believes that the ability of investors to meet actuarial assumptions will rest on putting “a significant amount of your capital into private equity.”

Privcap:  How has the NYCERS pension fund responded to current market challenges?

Barry Miller, New York City Employees’ Retirement Fund: I think when you look at the retirement system today, the retirement system today is $125 billion. Within private equity, we have approximately $16 billion in commitments. So the challenge has been, for us, is that, frankly, the private equity portfolio is just too diversified. And the idea here was to be able to build a more concentrated portfolio, and that’s what we’ve told our trustees.

Our recommendation to them was building a more concentrated portfolio, and we believe we can get outsized returns, i.e., private equity returns, with the portfolio. So what we decided to do was to make a recommendation to our boards that we should reduce the number of relationships. So when we entered the secondary market, we took the position that we were not going to sell individual funds. We were selling relationships.

So when we did it, the goal was to reduce the number of relationships, and that’s what we did. We sold approximately a billion dollars worth of kind of transaction size. And the idea there was continue to push down the number of relationships that we have, while continuing to deploy more capital into the asset class.

Privcap: You were once a GP.  Now, as an LP, what have you learned about what it takes for a GP to successfully raise funds?

Miller: I think when you look at it, there’s clearly a bifurcated market. There are some groups that have just raised money incredibly quickly. And I think there’s kind of three things that go with this that makes a successful fund raise. One is, if you look at the team, turnover is not a good thing. When you look at the depth and breadth, you want to have people that are your kind of ones, twos, and threes. You want to have a senior team that’s been together for a long time, and that’s something that’s very important from the LP’s perspective.

Second part is– what we always tell people is investing money, it’s one of the easiest things in the world. But the reality of the situation, what you need to be good at, is distributing money and selling companies. So this ability to return capital to LPs, that’s something that’s very, very important. But it is a fine line because, again, when you get money back from a GP, you’ve now got to reinvest that money, but to be able to show that they’ve been able to execute on what they’ve told you on the strategy when you met them.

And the third thing is the proof is in the pudding, which is just realizations in general. It’s not so much how much money you’ve gotten back, whether it’s a partial realization or a full realization. But the real story is it’s IRR or multiple because that’s what people are marketing off of. When you talk to people, everybody is top quartile. So kind of one of the most amazing things out there that you’ve got an industry which is all top quartile.

That being said, it really is. You benchmark people. You look at the opportunity set. A lot of people look at IRR. A lot of people look at multiple. It’s just finding that middle ground because, in the end, what’s interesting is top performers in general are consistent top performers. There may be a bad fund, but in general, that’s the way private equity has been.

So if you back the best managers– and I think what’s interesting about it is when you look at the different types of managers. So you’ve got buyout managers. You’ve got venture managers. You’ve got growth managers. And when you look at the statistics, the biostatistics are quite interesting. The biostatistics are– if you invest in a top quartile manager, you make a lot of money. If you invest in a second quartile manager, you make less money. If you invest in a third quartile manager, you make a little bit less money.

Venture is very different. If you invest in the top quartile manager in venture, you probably make a tiny bit of money. You need to be in the top decile to really make money. But when you go in the second, third, and fourth quartile, you lose money. So it’s a very, very different strategy. So you need to really invest with the best people that you can, but you need to be in an asset class that’s giving you returns.

One of the things that’s very interesting about all the managers that we meet, and I talk with our CIO about this all the time, is that what’s amazing is we have some managers that have great track records, but have a very difficult time raising money. We have other managers that have an okay track record, but they don’t have a problem raising money. And that the prospective here between the LP and the GP is how a GP treats his LPs. And it’s very, very important because the story always becomes, when you’re working on something, not everything is going to work out perfect.

But you want to be in a situation where someone gives you the benefit of the doubt when something comes up. You don’t want to always have to prove yourself. And I think that’s one of the challenges that some GPs have is they get a little bit complacent with regards to their LPs. Fundraising is not once every three years, every four years. Fundraising is a nonstop battle.

And our CIO has done a lot of fundraising in his previous life. And what he  has been great at doing– and I think what’s important in the marketplace today, where it wasn’t appreciated as much as today– is you constantly have to interact. You constantly have to dialogue with people. You want to have a relationship with someone.

This idea of, at least when you’re a big LP and you reach out to one of the GPs, you want them to call you back. You want to be able to have the information. And I think that when fundraising was so robust– if you look at the last set of fundraising for a lot of GPs– they were a little bit complacent. Now they understand how important it is. Because the reality is it doesn’t matter if you’re the best investor in the world if you have no money to invest. Nothing’s going to happen.

Privcap: What specific things can GPs do to strengthen their LP relationship?

Miller: One of the things LPs have been talking about– and they’ve put together this organization which is ILPA. And one of the challenges becomes is that being in– call it 99 general partners and 150 plus funds– as you can imagine, everybody reports just a little bit differently. Everybody’s capital call looks a little bit different. Everybody’s distribution notice looks a little bit different. And everyone’s quarterly reporting looks a little bit different.

While the idea to be able to come up with a standard reporting package– and that’s something that ILPAs been talking about– would be helpful for large LPs, I think the challenge becomes that everybody wants something different, and it’s finding that middle ground. One of the biggest challenges today is every LP wants something different. And this ability to kind of homogenize what the GPs are going to give you, it’s on the wish list of many, many LPs, but it’s hard to find that ground. So that’s one thing that I think would be very, very helpful.

The second thing– and a lot of this is a little bit on the kind of reporting side– which is the ability to find a platform that everybody can use. So this idea of being able to electronically distribute the information to LPs so it can be captured in one kind of database, similar to some of the databases that people use on the fundraising side, would be very, very helpful, especially for large LPs with lots of relationships and not necessarily all the resources that the private side of the industry has.

And I think the last piece that everyone talks about is just more transparency from the GPs. They’ve made enormous strides on the transparency side. But the reality is is that there’s always room for more. And as they continue to do that– private equity today, it’s got a little bit of a bad reputation. There is a lot of negative press. And I think the challenge becomes is that the GPs, while they’ve got their own organizations to try to kind of give themselves a better brand and a better name, the reality is is that P is in the press a little bit more than I think, in general, LPs would like and, frankly, for GPs as well.

Privcap: LPs now want fewer GP relationships – how is this affecting the private equity industry?

Miller: I think what’s interesting about the industry is that there has clearly been a pull back from a lot of LPs. There was this notion, through the downturn, that people were over-allocated to the asset class. Combination of that was the denominator effect that everyone talked about. Which is, as the public markets went down, then private equity just went up. Kind of just simple math, numerator and denominator. And I think that was one of the challenges.

And people realized that an over-commitment strategy that certain people took was not a great strategy. And the reality of the situation is– and I think we’ve all known this, but we didn’t all really understand this– it isn’t a liquid asset class. While there is a secondary market you can utilize to gain liquidity, there is a cost. It’s a very, very expensive asset class to re-balance. And when you look at it today, there’s a lot of LPs that are still investing in the asset class. They just have less money.

So when you go back and you speak to a GP and you ask them about fundraising, the question always becomes not what do your re-ups look like, but what do your re-ups look like with the LPs that are still investing in the asset class? And I think what you hear from a lot of people that the answer is we’ve got 75% re-up. So that’s a good number.

But when you peel back the onion, the statement then becomes, well, we’ve got the same number of LPs, they’re just giving us half as much money. And that’s a trend in the marketplace– that people are still investing in the asset class, but it is harder to raise money. But there is a core group of North American LPs that continue to deploy significant amounts of capital.

Privcap: You manage a $16B private equity allocation.  What are the keys to success in managing such a sizable fund? 

Miller: Well, I think it’s important when you look at the retirement system— I can only speak for private equity. Our CIO is in charge of, with the boards, the overall asset allocation. But what I can tell you in private equity is what we target are kind of the best of breed managers. We believe that it’s an asset class that will give you your actuarial return, this 8% return, or 7% to 8%, that a lot of public pension systems have.

And the reality is when you look at the models, the asset allocation models, the only way to really get those returns is to put a significant amount of re-capital into private equity. You have to kind of overshadow that liquidity. But I think the real story is is we want to build a concentrated portfolio. We want to invest with the best managers out there. And when you talk to the managers– I think the reality is while we’d love to get 20% net returns, I don’t think there’s anybody out there that wouldn’t want to get 20% net returns– the reality is if we can get very consistent returns with less volatility, we can take a little bit less.

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