Members Present: John Hammond, Howard Brown, Dennis Callahan, Jay Cuccia, Richard K. Drain, Andrea M. Fulton, Jennifer Gilbert-Duran, Jonathan Hodgson, Jay Middleton, M. Kathleen Sulick, LeRoy Wilkison
Members Absent: Janelle Davis
Staff Present: Janet Morgan, John Peterson
Guests: Mark Andrew, Rhett Humphreys, Joseph Kaufman
Recorder: Laura C. Jackson, Audio Associates
The meeting of the Board of Trustees of the Anne Arundel County Retirement and Pension System (Board) was called to order at 12:15 p.m. by John Hammond.
Minutes
Mr. Callahan made a motion to approve the minutes for the December 10, 2009, Board of Trustees meeting. The motion was seconded by Ms. Fulton and approved unanimously.
Investment Committee
TCW
TCW is an experienced mezzanine investor with a 17-year track record of disciplined investing. Since 1992, the firm has invested $5.3 billion in 130 mezzanine transactions. Offices in Los Angeles, New York and Paris allow TCW professionals to assess the very best deals available in the U.S., Europe and Asia Pacific, said Mr. Kaufman.
TCW had been in the news recently due to the termination of its CIO, said Mr. Kaufman. TCW’s mezzanine efforts operate under separate management and governance and are virtually unaffected by the situation, he said.
TCW maintains extensive relationships with leading private equity sponsors and is in a good position to take advantage of current market opportunities. Mr. Kaufman said a tremendous amount of capital has been raised since 2006. The LBO market is just starting to show signs of activity after the credit crisis, and private equity firms have significant amounts of “dry powder” or committed, undrawn capital, he said.
Although the competitive landscape continues to evolve, TCW has noted attractive opportunities, said Mr. Kaufman. During the last few years, practically every deal has required mezzanine, so TCW can capitalize on its unique position. Another benefit of the recent financial turbulence has been the shakeout of “fast money,” such as the hedge funds, he said.
TCW’s Fund IV, a 2006 vintage fund, has invested about $1.6 billion in 24 companies, which represents 95 percent of committed capital. This diverse portfolio includes a range of industries, geographies and sponsors. The fund has realized $460.8 million through portfolio activity.
Reviewing the companies in TCW’s Fund IV portfolio, Mr. Kaufman said Aeroflex has done well, and Cambium is off the firm’s watch list. In response to a question from Mr. Hodgson, Mr. Kaufman provided a basic definition of TCW’s investment strategy. Mr. Kaufman noted that TCW gets board seats or board observation rights as part of its relationship with the companies in its portfolios, and managers talk to sponsors regularly.
The companies on this year’s watch list suffered negatively from reduced consumer spending or a slowdown in construction. The companies include Tourneau, a high-end watch retailer; Mattress Firm, which took a hit from consumer spending and construction; and Thomas Nelson, a religious book publisher that experienced a squeeze on its supplier cycle.
TCW’s Fund V is a vintage 2008 fund with $2.85 billion in committed capital. TCW has invested in 10 companies so far, said Mr. Kaufman, which represents 29 percent of committed capital. The sale of Alltel, a crossover investment between Fund IV and Fund V, helped to mitigate the J curve for this fund. Unrealized investments in Fund V include Booz Allen Hamilton, Sun Products and TASC, Inc. Overall, TCW is happy with its pace of investing, said Mr. Kaufman. Managers want to see every deal but they don’t feel a need to rush.
Lexington Partners
Based in New York, Lexington is the largest independent manager of secondaries with more than $15 billion of pro forma secondary capital. The firm has completed more than 270 secondary transactions acquiring more than 1,400 interests. In addition to its U.S. offices, Lexington also has staff in London, Australia, Hong Kong and India.
Deleveraging and distress among global financial institutions have created significant secondary market opportunities, said Mr. Andrew. The financial slowdown also has caused allocation and funding concerns for pensions, endowments and foundations. In 2010, however, Lexington expects banks and others to come back to the market.
For 2010 to 2014, the firm projects an $8- to $15-billion opportunity. The firm sizes its funds on the basis of these projections, said Mr. Andrew. Assets available for purchase include private equity partnership portfolios, large concentrated limited partnership interests, and portfolios of co-investments. He noted that this isn’t the time for investors to sell to Lexington as the firm has the ability to get premium returns due to purchase discounts.
Lexington VI is a vintage 2006 global secondary fund with a total capitalization of about $3.7 billion. About $3.5 billion has been committed to invest, or 93 percent of total capitalization. Lexington has completed 68 secondary transactions, acquiring 215 interests in 172 partnerships managed by 103 sponsors. The average transaction size is $46 million.
To date $686 million has been distributed to Lexington VI partners. Including $248 million of capital available to deploy in secondaries, the fund has more than $900 million yet to be invested, said Mr. Andrew. About 60 percent of this fund is in U.S. buyouts. The county pension system invested $5 million in this fund, he said.
The firm is forming Lexington VII to continue the success of its strategies. With a target capitalization of $5 billion, this fund will include a mix of buyouts, mezzanine and venture capital. Lexington will focus on raising funds through September 2010, said Mr. Andrew. The county pension system has committed $10 million to Lexington VII, he said.
New England Pension Consultants
The fourth quarter of 2009, and the entire year overall, have been pretty good for the county’s pension system, said Mr. Humphreys. The “flash” report for the period ending December 31, 2009, reported a financial composite of 3.6 percent for the last three months versus a benchmark of 3.1 percent. For the last year, the composite was 22.2 percent, whereas the benchmark was 17.9 percent.
Reviewing the basics of private equity, Mr. Humphreys briefly discussed the differences among venture, secondaries, mezzanine investments. Because of its favorable position, the county can exploit investors who have to sell at a discount in the secondary market, he said.
Individual managers such as Buckhead enjoyed a strong returns last year, said Mr. Humphreys. Buckhead, for example, reported returns of 26.3 percent. The benchmark was 20.6 percent. Southeastern was the story to write home about, Mr. Humphreys added, noting its performance of 59.9 percent last year. The benchmark posted returns of 19.7 percent. International equity managers didn’t perform as well, he said.
The “flash” report revealed more good news for bonds, said Mr. Humphreys.Further, although the pension system has held the Loomis bank loan for less than a year, this investment has earned $7 million. Global asset allocation worked well during down periods as well as on the upside, said Mr. Humphreys. Bridgewater posted returns of 9.5 percent for last year versus a benchmark of 4.2 percent. Wellington reported 35.8 percent for last year, whereas the benchmark had a performance of 25 percent.
The investment committee will meet February 4.
Administrative Report
Mr. Peterson said the pension audit process has begun. This is the last year of the contract, so the pension system will have to go out for bid and begin the RFP process, he added.
The valuation process has also begun with Bolton Partners, the actuarial firm. Bolton will report valuation numbers in April. Mr. Peterson said the numbers should be a little bit better than last year given the performance of the fund.
Pension staff members will work on benefit statements around the same time because they collect similar data, so they will work closely with Bolton on that as well, said Mr. Peterson. The pension statements won’t come out until end of June or early July. Further, active employees in the DROP program should get an annual statement at the end of January or early February. The staff plans to bring a pension budget to the Board in March.
The meeting adjourned at 2:30 p.m. The next meeting will take place February 11.
