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Board of Trustee Meeting Minutes - January 13, 2011

Members Present:  John Hammond, Howard Brown, Dennis Callahan, Jay Cuccia, Richard K. Drain, Jennifer Gilbert-Duran, Jonathan Hodgson, Jay Middleton, LeRoy Wilkison            

Members Excused: Janelle Davis, Andrea Fulton, M. Kathleen Sulick

Staff Present: John Peterson

Guests: Chris Ade, Mark Andrew, Joseph Kaufman, Rhett Humphreys,   

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 12:20 p.m. by John Hammond.


Mr. Callahan made a motion to approve the minutes of the December 9, 2010, board meeting. Mr. Cuccia seconded the motion, and the motion passed unanimously.

Investment Committee


On January 1, 2011, TCW’s Leveraged Finance Group became Crescent Capital Group, LP, a new registered investment advisor. The name has changed but the players are the same, said Mr. Kaufman. The change will allow the firm to return to its roots and focus more on investors.

Crescent manages $11 billion in assets across a range of strategies, including bank loans, special situations and mezzanine. Since 1992 the firm has invested more than $6.2 billion in 140 mezzanine transactions. Crescent reviews hundred of deals before narrowing those opportunities down to a select handful, said Mr. Kaufman.

Mr. Kaufman noted that 2010 was a busy year as the credit markets opened up. A significant amount of private equity money is available, he added, although volatility still exists in the high-yield markets. Many of the players who fueled the economic boom are gone, creating  attractive opportunities for Crescent. He noted as well the amount of debt expected to mature in a few years. Although refinancing has pushed out maturities, the firm still sees opportunities here as well, said Mr. Kaufman.

Currently, Crescent has six investment vehicles. Fund IV is fully invested, whereas Fund V remains in the early phases. With $1.7 billion in committed capital, Fund IV is a vintage 2006 fund. The firm has invested $1,618 million in 24 companies, representing 95 percent of capital. It also has completed 8 realizations, of which 3 have been full realizations.

Reviewing the individual companies in the portfolio, Mr. Kaufman said Kinetek Industries, a company that makes engines and motors, has enjoyed a nice rebound. Retail has begun to recover after hitting the bottom in previous years, he said. Further, companies such as David’s Bridal and Sports Authority seek to use strategic partnerships and other tactics to increase revenue and control costs. In response to a question from Mr. Hammond, Mr. Kaufman said he couldn’t yet forecast what kind of return the fund would get.

Fund V is a vintage 2008 fund with $2.85 billion in committed capital. Crescent has invested $1,719 million in 20 companies. The firm has completed four realizations, of which three have been full realizations. Mr. Kaufman said the fund has performed well, noting that Booz Allen Hamilton, Global Tel*Link and Radiation Therapy Services have provided good value to the portfolio. Crescent invests 35 percent of this fund outside of the United States.

Mr. Hammond questioned whether Crescent’s underwriting standards have changed given that 8 out of the 22 deals in Fund IV are underwater. Mr. Kaufman said that although value is down in some cases, the portfolio has the benefit of time. Further, Crescent has a good track record of staying with deals and ending up with good returns. 

Lexington Partners
The largest independent manager in its market, Lexington has $16 billion of secondary capital and more than 280 secondary transactions completed, acquiring more than 1,600 interests.     Mr. Andrew noted the firm is about to open an office in Hong Kong. The state of Florida also owns about 9 percent of the firm, he added. Among its strengths, Lexington offers an experienced team, an extensive global platform and strong seller recognition.

Mr. Andrew provided an overview on the secondary markets, noting a sharp decline in transactions in 2009. Activity returned in 2010, he said, particularly with banks. Lexington completed large transactions with Citibank and Bank of America, and the firm expects that level of business will continue into 2012. The firm foresees an unprecedented $100 billion secondary market opportunity.

After a brief overview of Lexington’s secondary market strategy, Mr. Andrew provided specifics on funds V, VI and VII.  Fund VI, in which the county is invested, is a vintage 2006 fund with a total capitalization of $3,774 million. The fund is completely committed as of June 2010, he said.

The average transaction size in Fund VI is under $50 million, said Mr. Andrew. Last year the firm distributed a record $345 million to its partners. Reviewing the firm’s sponsor exposures, Mr. Andrew said Lexington seeks quality GPs. Its sponsors have a proven ability to work with portfolio companies and get great values, he said.

Fund VII, in which the county also is invested, has a fund-raising target of $5 billion to $6 billion. The fund has committed to 10 secondary purchases, with a total investment of more than $1.6 billion. The deal pipeline seems quite robust, said Mr. Andrew, but Lexington plans to make cautious purchases during the next 6 to 12 months.

New England Pension Consultants

Mr. Humphreys began his remarks by announcing that NEPC’s Keith Stronkowski has received his promotion to consultant. Moving on to the “flash” report for the period ending December 31, 2010, he said the financial composite showed returns 4.3 percent for the month and 15.5 percent year to date. The composite return of 15.2 percent should increase once NEPC factors in the results from other outstanding investments, he added.

U.S. equity managers such as Chartwell had a strong performance, said Mr. Humphreys, which helped the total equity composite post returns of 17.7 percent for the year. Buckhead trailed its benchmark slightly but still had a year-to-date performance of more than 20 percent. For international equity, small cap manager GMO reported year-to-date returns of 21.2 percent, just slightly below its benchmark.

Western and ING, two fixed income managers, both performed well, said Mr. Humphreys. Penn was up 15.7 percent year to date versus its benchmark of 14.3 percent, and Loomis Sayles’ performance was 8.4 percent for the year, just slightly under its benchmark. That was a good return, particularly in light of the firm’s highly conservative investment approach, he said.

Under Total GAA, Bridgewater and Wellington both had a good month, said Mr. Humphreys, with returns of 2.8 percent and 5.4 percent respectively. Year to date, Bridgewater’s performance was 24.7 percent versus a benchmark of 6.1 percent. Wellington posted 17.7 percent for the year. Its benchmark was 11.4 percent. Overall, he said, the county had a good report.

The Investment Committee will discuss the pension system’s asset allocation during its next meeting on February 3.


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