I. 2017 Private Equity Search Process Timeline & Allocation Objectives II. Manager Search Process III. Portfolio Construction IV. Manager Selection & Recommendation V. Requested Board Action 2
Section I 3
• TMRS staff presented the 2017 Private Equity Pacing Plan recommending a Dec commitment of up to $600 million of Private Equity exposure. 2016 Dec • TMRS Staff formally launched the 2017 search process, in concert with StepStone. 2016 • Conduct manager reviews through a multi-phase evaluation process for all Q2 2016 candidates. – • Multiple conference calls with StepStone to score and determine best candidates for Q1 2017 TMRS, as well as incorporate their sourcing and due diligence. • February 2017: TMRS Board approved two managers/three funds for the Private Equity Asset Class for $125 million. Q1 2017 • Closed on all funds at $116.25 million. • Presenting two managers/three funds to the Board for a total of $132.5 million. Current • Continue 2017 search process for Aug/Sept recommendation timeframe. 4
Excess Return Potential ◦ Expected excess return consistent with TMRS’ overall objective for Private Equity asset class: Russell 3000 + 3.00%. ◦ Identify best in class managers currently in fundraising. Portfolio Diversification ◦ Balance concentration and diversification across managers. ◦ Ensure sufficient strategy diversification, consistent with policy guidelines, and whenever possible incorporate tactical and opportunistic considerations into manager selection. Targeted Commitment Level ◦ Per the December 2016 Board approval, the targeted Private Equity Pacing Plan for 2017 is for up to $600 million. 5
Section II 6
Manager Screen & Universe Analysis Scoring Scoring Category Score / Outcome Manager Screen Yes - Take Meeting; No - Don't Take - Is vehicle consistent w/ TMRS' Meeting objectives? Manager Analysis - Does vehicle have 1 - Advance; 2 - Stop adequate capacity and Research timeline? - PPPPT* Preliminary Review Semi-Finalist Scoring Matrix Scoring Category Score Finalist Manager Review - Questionnaire Review A - Prioritize for Final Due - Detailed PPPPT* Review Diligence - In-depth Manager Qualifications B - Perform More Research Review C - Stop Research / Manager - Compliance with TMRS IPS not Selected - Verification of Research, References, Further Market Research Final Due Diligence Scoring Matrix Scoring Category Possible Points People (Firm & Team) 0 - 40 points Philosophy (Attractiveness of Opportunity / Portfolio Fit) 0 - 20 points Process (Sourcing, Underwriting and Managing) 0 - 40 points Performance (Historical / Expected) 0 - 40 points Terms (Fees, Liquidity, etc.) 0 - 20 points Total 100† 7
136 distinct buy-out managers sourced 83 distinct buy-out meetings (61%) 16 on-site buy-out meetings (12%) 2 buy-out managers/ 3 funds (1.5%) Cumulative buy-out manager selection rate 6.6% 8
Final Due Diligence Scoring Matrix - Aggregated Results* Comparable Comparable Recommended Manager/Fund Manager Score† Mgr. 1 Score Mgr. 2 Score Capital Partners Private Equity Income 100.0 91.0 89.0 Fund III, L.P. (Capital Partners) Altaris Health Partners IV, L.P. (Altaris) 100.0 95.0 83.0 Altaris Constellation Partners IV, L.P. N/A N/A N/A (Constellation) *Scoring matrices utilize difference calibrations depending on the strategy being utilized. †Selected managers standardized to a score of 100 to allow comparability among selected managers. 9
Section III 10
Figure 1 : Private Equity Strategy Diversification by Commitment Strategy considerations: Buy-out (40.0% to 2015: Overweight special situations 75.0%) 30.9% 45.3% early for J-Curve mitigation, Growth (5.0% to 25.0%) efficiency of capital deployment, Special Situations and tactical opportunities. 23.8% (10.0% to 35.0%) 2016: Focus on growth opportunity set and continue to add buy-out Figure 2 : Private Equity Target Diversification exposure. 2017: Round out buy-out portfolio, Buy-out (40.0% to and opportunistically add to growth 75.0%) and credit. 27.2% 33.0% Growth (5.0% to 25.0%) Special Situations (10.0% to 35.0%) 22.5% Un-allocated 17.3% 11
Figure 3: Private Equity Manager Diversification by Commitment BO 1 BO 2 BO 3 BO 4 The overall goal remains identifying BO 5 BO 6 top quartile performers to partner BO 7 BO 8 with. BO 9 BO 10 BO 11 GE 1 GE 2 GE 3 Position sizing considerations: GE 4 GE 5 SS 1 SS 2 Continue to reduce the unallocated SS 3 SS 4 portion of the private equity SS 5 portfolio while sensibly balancing Figure 4: Private Equity Target Manager the trade-off between Diversification diversification and concentration. BO 1 BO 2 BO 3 BO 4 BO 5 BO 6 Areas of focus are enhancing BO 7 BO 8 manager diversification, and BO 9 BO 10 building strategic relationships BO 11 GE 1 where possible/appropriate. GE 2 GE 3 GE 4 GE 5 SS 1 SS 2 SS 3 SS 4 SS 5 UA 12
TMRS is focused on taking a measured approach to global geographic diversification. Figure 6 : Private Equity Target Geographic Figure 5 : Private Equity Geographic Diversification Diversification by Commitment 17.8% 27.2% U.S.A. U.S.A. International International Un-Allocated 59.8% 13.0% 82.2% The T Target P Portfolio lio k keeps a a conserv rvativ ive sta tance o on i inte ternati tional e expos osure. 13
Section IV 14
Summary ary of of R Recom ommenda dation ons Classification Target Return Recommended Strategy Recommended Manager/Fund Amount Capital Partners Private Equity Income Buy-out Strategy 18% / 1.8X $70 million Fund III, L.P. (Capital Partners) Altaris Health Partners IV, L.P. Buy-out Strategy 20% / 2.0X $50 million (Altaris) Altaris Constellation Partners IV, L.P. Buy-out Strategy 25% / 2.5X $12.5 million (Constellation) Total Net Recommendations: $132.5 million Private Equity Pacing model as approved by the TMRS Board of Trustees in December 2016 established up to $600 million as the targeted level of commitments for 2017. 15
Capital Partners (the firm) is a Norwalk, CT based lower middle market private equity firm with 17 professionals focused on making control equity investments with the objective of generating attractive risk‐adjusted returns through a combination of low leverage, quarterly cash distributions to investors, and longer‐term capital appreciation. As with prior funds, Capital Partners will seek to acquire family or founder owned companies with $4-25M of EBITDA which possess relatively stable cash flows and modest capital expenditure requirements within the business services, distribution and manufacturing, and consumer products sectors. Capital Partners is seeking $500 million in capital commitments with the goal of investing in 10 to 12 portfolio companies. Small Buyout Small Buyout Reasons to Invest Category Capital Partners Comp 1 Comp 2 - Experienced investment team with no turnover – The 3 Managing People 21 18 20 Directors have substantial experience in the U.S. lower middle Philosophy 21 16 20 market, with an average of 29 years-experience focused on private Process 22 22 19 equity investing. Performance 21 22 19 Terms 15 13 11 - Attractive strategy - The Firm differentiates itself by employing a Total 100 91 89 low-debt capital structure to enable quarterly cash distributions to investors, in addition to longer-term capital appreciation through realizations. - Loss ratio of 0% and very low entry multiples (6x – 7.5x EBITDA). Risks & Mitigants - Fund II performance – Fund II is still largely unrealized, but is tracking similarly to Fund I at this stage. Also, one platform company is still being held cost and will likely be written-up as the company’s infrastructure is improved. - Mixed sourcing strategy – Significant deal flow generated via auction process. However, most deals have been completed via broken/limited auctions or directly negotiated with owners. 16
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