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Key VC opportunities lie within battery technology and information technology space, CIO Chad Jacob says

By Muskan Arora

The $3.8bn City of Fresno Retirement Systems returned 10.4% for the fiscal year ended June 30, against a benchmark of 9.9%. Private equity returned 9.8% for the fiscal year.

Our reporter Muskan Arora sat down with CIO Chad Jacobs to dive deeper into the private equity and venture capital opportunities identified by the system. Over the years, he has had continued focus in Asian private markets and considers partnering with GPs who speak the native language of the region.

Muskan Arora: As most allocators shift towards healthcare and technology investments within their private equity sleeve, is there any other sector that you see developing?

Chad Jacobs: That’s hard to say, but one that does appear to be gathering steam across markets, and countries, is the energy transition.  It’s still early days but as traditional energy practices are potentially wound down/phased out over the coming decades, harnessing the technological innovations in batteries and its respective capabilities, along with energy storage, could be game-changing advancements.  The estimations for new energy technology, whether it be solar, wind, hydro, or geothermal, are in trillions of dollars.  Obviously, no one country can afford those plans individually, so it’s critical the public and private sectors work together and develop solutions that can benefit society now and in the future.

Arora: Why do you think there has been a shift towards these sectors?

Jacobs: The energy sector in particular has experienced significant mandates towards reaching various goals that global governments have enacted over the last several years.  The other side of the coin is that consumers are still somewhat skeptical about the technology and the manufacturing processes involved.  CFRS does not have a policy related to ESG principles, but we also understand their importance in understanding the entire picture of an asset or GP.  Most managers nowadays are fully cognizant of their pros and cons and consider, but do not mandate, them when evaluating which assets to buy or sell.


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Arora: How much are you looking to allocate to PE for the rest of the year and what strategies are you most focused on and why?

Jacobs: CFRS staff and our consultant, NEPC, provided our Joint Boards with a pacing plan earlier in the year that suggested $30-50 million in commitments.  That is a helpful guide for our Trustees, but staff and NEPC are consistently monitoring the portfolio to determine how the capital should be allocated.  We have spent many years educating our Boards on the opportunity set in the Asian private markets, and private equity specifically, that we have committed approximately $200 million to the space in the last 18 months.  We are not contrarian investors, but we are fully aware of how a lot of peers have adjusted their commitments to the region in recent years.  Our goal has always been to construct a globally diversified ‘best ideas’ portfolios with managers that are specialists in their given field.  We expect them to find innovative companies and management teams to disrupt existing markets that can identify nuances in local economies who are nearly invisible to an investor like us halfway around the world.  Partnering with GPs who have teams on the ground, that speak the native languages, and have deep relationships with key firms is paramount for success.  We expect to invest across all stages: venture, buyouts, secondaries, and co-investments.

Arora: What do you anticipate the next big thing in PE to be?

Jacobs: A few years ago, the buzz was around Web3, and we’ve all seen how that kind of fizzled out and is not discussed anymore.  Now it’s anything AI-related.  There is a better chance a few AI firms really hit the jackpot since it’s a more than just a concept and has actual applications users can tinker with.  CFRS is focused on identifying and partnering with firms that we believe can be long-term partners.

Arora: Why do you think there has been a shift towards these sectors?

Jacobs: I saw an interesting timeline about a year ago, based on the term coined by Joseph Schumpeter in 1942 as ‘creative destruction’, that highlighted the waves of ‘Innovation Cycles’ since the Industrial Revolution.  It identified six key ‘waves’ and displayed how each successive wave produced greater advancements in technologies in shorter and shorter periods.  The first wave took 60 years to play out while the most recent wave will barely take 25 years to complete.  For example, textiles and iron, were key innovations in the late 18th century and that eventually graduated to steam engines, then cars, then planes, then computers, and finally AI and renewable energy currently.  To think that less than 30 years ago, personal computing was almost non-existent in most households to where virtually everyone is walking around with a small supercomputer in their pockets, is mind-blowing.  As a kid, and even now, I enjoy the Back to the Future movie trilogy and loved the hypothetical futuristic technology that was dreamt up back in the late 1980s, and can only imagine the developments my children and grandchildren will experience compared to today. 

Arora: Owing to the current interest rates, what are the few factors you keep in mind when allocating in venture capital?

Jacobs: We have only made one investment directly with a venture firm and interest rates are (mostly) immaterial to their process.  With that said, and the broader venture ecosystem as a whole, we understand that interest rates have had a negative impact across all of private equity, including venture capital.  The impact has been most acute in the transaction market which has essentially been frozen for a few years now.  Valuations got too far ahead of themselves, and a lot of GPs have been reluctant to mark their positions down.  It’s a catch-22.  We do our best to avoid highly cyclical strategies or those subject to (potentially burdensome) government regulations.

Arora: Within venture capital – what kind of opportunities do you consider as risks?  And what kind of sectors do you find attractive, especially in this current interest rate environment?

Jacobs: It’s well known that most venture investments will lose money and likely go out of business, and we accept those dynamics and terms.  We are not market-timers but positioning the portfolio to be somewhat defensive in nature, while taking opportunistic bets, we believe can generate reasonable risk-adjusted returns.  There are few places to hide when global central banks increase interest rates to multi-decade highs in a matter of months but allowing Pantheon to use their network to identify managers that are non-cyclical sector specialists is paramount to the success of the program.  These firms might already have a product in the market in the beta testing phase, or have a somewhat reliable and recurring revenue stream that is not totally dependent on the next funding round or macro events.

Our VC sleeve is fairly concentrated with exposures in key sectors such as battery technology, communication services, and information technology.  The majority of it is in battery technology and information technology. 

Arora: Could you talk a bit more about the discretionary Fund of 1 with Pantheon Ventures?

Jacobs: I like to joke that we were (one of) the last public pension funds to make an allocation to private equity.  Obviously, that’s not true but we did not make our first proper investment until 2019.  The idea to get into private equity predates my arrival at the fund.  My boss the Retirement Administrator, Rob Theller, as well as our investment consultant, NEPC, spent a lot of time educating our Boards on the pros and cons to investing in the strategy.  Shortly after I joined the fund in late 2016, we updated our Strategic Asset Allocation to make an initial investment in PE.  As a small fund, with a limited network, staff and NEPC believed the most prudent and reasonable starting point was in a Fund of 1.  After meeting with several firms, we ultimately decided to move forward with Pantheon.  The maiden investments were across the main strategy types utilizing their allocation model in a globally diversified portfolio.  We decided to re-up with them last year and incorporated some of our views and considerations to further customize the fund.  They were open-minded and willing to adjust their model to better reflect the needs of our total fund.  They have been a great partner to us and have proactively shared unique insights into their proprietary processes across the various strategies: buyout, secondaries, and co-investments.  We feel they have all the tools to continue being a long-term partner to our fund.