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.
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.
