Alpha Edge Recognition - Alpha Generation: Private Equity Investing
This year, Allocator Intel will be recognizing leaders in the allocator community, acknowledged by their peers, for exceptional leadership in key areas of portfolio construction in the Alpha Edge Recognition Awards.
Nominated for Alpha Generation in Private Equity Investing, Massachusetts Pension Reserves Investment Management Board (Mass PRIM) has defined itself by a culture of strong leadership, collaboration, and thesis-driven approach to manager selection. Over the pandemic, including lockdowns and the subsequent bull market fueled by government stimulus and investor exuberance, Mass PRIM has stuck to its annual commitment modeling process, including its private equity allocation target.
The $94.4 billion public pension fund is located in Boston, represented by Michael McGirr, CFA. After his graduation from Cornell University, he has built his career on private investing since when he worked at the Minnesota State Board of Investment during the Global Financial Crisis. At PRIM, he spent six years as Senior Investment Officer before assuming his current role as Director of Private Equity.
The following is edited for length and clarity.
Can you share an overview of what your portfolio looks like today?
PRIM was a very early investor in private equity starting in the mid-1980s, and today private equity is about 17% of the overall allocation (the “PRIT Fund” – approximately $16.5 billion. Private equity (PE) is a vital return driver at PRIM and is our highest performing asset class over most time periods.
Recently, PRIM’s private equity portfolio was ranked Number 3 in 2022 among 178 U.S. public pension funds based on our strong 10-year performance.
What have been the most significant changes over the last few years?
The rapidly changing environment has been challenging, including the pandemic, the lockdowns, the subsequent bull market fueled by government stimulus and investor exuberance, the resulting Fed tightening and severe market correction. These factors put incredible pressure on the key variables that drive commitment modeling — contributions, distributions, NAV appreciation/depreciation — and many investors find themselves over-allocated to private equity.
At PRIM, we are within our targeted allocation range for private equity and are actively deploying to the asset class. The fact that we're still within our range is really a testimony to the robustness of PRIM's very disciplined annual commitment modeling process.
What factors influence you most when evaluating opportunities in your investment space?
We believe a few factors drive the success of PRIM’s private equity program. PRIM’s size and longevity in the asset class allows us to invest with some of the best managers and gives us access to attractive co-investment opportunities. Located in the heart of Boston, PRIM benefits from being in a major metropolitan area that is also one of the birthplaces of the private equity and venture capital industry. Additionally, our highly skilled staff operate a disciplined and rigorous investment process that focuses on objective measurements in the initial phases and defers to more subjective judgments in the latter stages of due diligence.
One of our beliefs at PRIM is that the three parameters to consider when making an investment are return, risk, and cost. Our team often discusses the roles luck and skill play in investing and private equity. It is very difficult to detangle the two with any form of precision. Our team is focused on trying to identify managers with a high degree of skill who we think can generate strong absolute net returns and risk-adjusted alpha and, importantly, are well positioned to continue to do that in the future.
When looking to form a strategic partnership with an asset manager, what are the key areas on which you focus?
We are looking to form long-term partnerships with PE managers. When we make a commitment to a fund, we are really hoping to build a relationship that spans across multiple funds and potentially co-investments as well. The average PE fund life is likely 12 years or older, so a multiple-fund relationship could easily get to 20 years or longer. A lot can change over 20 years.
I think that change is why everybody says this is an industry where people are so critically important, so we are trying to align ourselves with talented people. At PRIM, we value the principles of collaboration, intellectual curiosity, humility, and integrity and look for those qualities in other asset managers as well.
What investment opportunities are you focusing on over the next 12 to 18 months?
The PRIM board recently voted to approve our multiyear effort to gradually increase our allocation to private equity. For us, that roughly translates into a commitment goal of between $2.2 billion to $3 billion for the calendar year. I am proud of the fact that we are not over-allocated in today’s environment, as we’ve found that maintaining a consistent pace of private equity commitments has been a key contributor to our long-term success.
We have observed throughout our history that some of the highest-performing private equity vintage years originate during volatile times, just like this, when others in fact may be cutting their commitments for a variety of reasons. Over the next 12 to 18 months, we will redouble our efforts on improving the quality of the portfolio. We have a high-quality pipeline of opportunities that are competing to get into the portfolio. We’ll continue to selectively look at venture capital and smaller growth equity and buyout strategies. We expect to continue to evaluate co-investment opportunities alongside our existing roster of managers.
What challenges do you anticipate for your team over the next few years?
We face the same market challenges that others in the industry are facing, namely increasing geopolitical tensions, higher levels of inflation, higher interest rates, and a constantly changing and dynamic economic landscape. At PRIM, we believe nobody can predict the future and that nobody can reliably predict the markets.
As a result, our team needs to continue to focus on what we can control, which includes staying focused on our strategy and investment process and adhering to our team’s guiding principles. Our team is focused on finding talented private equity investment managers. We believe manager selection should be forward-looking and thesis driven. Our focus is on identifying managers who we think can generate alpha and are well positioned to continue to do that in the future.
What would you say is your office’s greatest accomplishment since you joined?
PRIM has done an excellent job of building an extremely high-performing team. This has only been possible due to our strong leadership. We have stability and continuity across our board and investment committee, including the Chair of the PRIM Board, Treasurer Deborah Goldberg.
PRIM is a staff-led organization, and PRIM’s long-term CIO and Executive Director Michael Trotsky sets the tone and the expectations internally and has worked tirelessly to build a strong foundation, which has allowed PRIM to thrive in a competitive market. Our people are what has allowed us to generate such strong performance. Without that foundation and culture, I am quite confident we would not have been able to generate the strong performance we’ve realized.
What do you like to spend your time doing?
I enjoy coaching my daughter’s softball team. I love reading and my perfect idea of a vacation is hiking in Acadia National Park with my wife.
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