Wes Bradle is a senior portfolio manager in private equity at the Florida State Board of Administration (FSBA). His duties include new investment underwriting, portfolio management, and monitoring. Bradle currently monitors 18 private equity firms and 36 funds that represent more than $4 billion in committed capital. Prior to FSBA, he was an investment officer in private equity at CalPERS.

In this interview, he discusses his greatest lessons learned at CalPERS and how he’s leveraged that at Florida SBA; why healthy governance doesn’t always mean more governance; and his hopes for a more balanced tone towards public pensions in the near future.

Wes Bradle was recently named as one of Trusted Insight's 2018 Top 30 Public Pension Institutional Investors. This interview has been edited and condensed for clarity.

Trusted Insight: You’ve been serving at public pensions for over a decade now, between CalPERS and Florida SBA. What attracted you to investing through the lens of a public pension? 

Wes Bradle: I’ve always had a passion for investing, but never targeted working for a public pension. I originally thought I wanted to be on the public equity side, maybe running a mutual fund. I started in finance with an advisor in Southern California, helping manage his clients' investments. While I really enjoyed my time there, I found that most individual investors wanted the same things. Once you set them up, it was pretty programmatic. I not only wanted to find something in the investment sector that was more dynamic but also wanted a job where I could help people.
 

"At the time, I knew very little about how endowments and foundations invested and I had never heard of sovereign wealth funds... it was really just a confluence of different events that led me [to CalPERS]."

It was a decision to relocate to Northern California to be closer to my family that ultimately exposed me to public pensions. As I began looking for investment jobs in Northern California, I came across a position in the alternative investments group at CalPERS. I knew about private equity as a few of our clients had investments in publicly traded companies that were bought out by private equity firms. It seemed like an interesting asset class and CalPERS was a place where I could both invest and positively impact other people. At the time, I knew very little about how endowments and foundations invested and I had never heard of sovereign wealth funds. I’d love to say that I really scouted out the universe of institutions and CalPERS was my first choice, but it was really just a confluence of different events that led me there.

Trusted Insight: Were there any major lessons at CalPERS that you were able to learn from and later use at Florida SBA?

Wes Bradle: Definitely! CalPERS was a great place to start because you see almost everything in the market. From an investment perspective, I learned a ton just by observing people the talented people I worked with who each had their own unique skill set. One person who was really great at building relationships showed me how to build a deep network with GPs, LPs, and others in the industry. Another person taught me how to effectively communicate with our PE partners and how to ask tough questions in a way that would generate useful data points. Asking a question like “can you help me understand the key decisions that led to underperformance?” would illicit a better response than “why is your performance so bad?” Another colleague was great at helping me develop a framework for deciding which funds to spend time on. He used to always ask, “How is this firm differentiated from everyone else?’ or “What do they do that’s unique?” If we didn’t have compelling answers, he wouldn’t support further work on that firm. This saved me a lot of time through the years!

 

"It’s important to note that healthy governance doesn’t always mean more governance... At Florida SBA, the executive director and the senior investment officer in private equity do a great job asking questions of the team, but also giving us a lot of autonomy."

I also learned a lot from some of the challenging times at CalPERS. One of the first funds I helped diligence ended up imploding in 2009 or 2010. I wondered if there was anything else I could have done during diligence that would have helped us avoid this fund. It’s probably not fair to think that way since hindsight is always 20/20, but that experience taught me to do everything in my power to make the most informed decision possible and sometimes it’s okay to wait for the next fund.

From an organizational perspective, my time at CalPERS taught me the importance of people. We had a lot of good people leave the CalPERS alternative investment team, many of whom went on to private equity firms, consultants, endowments, corporate pensions, or other public pensions.  Having all that institutional knowledge walk out the door was difficult. It also really changed the decision-making dynamic. Trust is built over years and when people you trust leave, it takes time to build trust with the new people that join. People leaving also caused me to start thinking about what’s next. I knew what I was looking for, but didn't think I would find it at another public pension. I wanted to spend as much time as possible sourcing, analyzing, and committing to private equity funds and then interacting with those firms. I also wanted to work with people that I really liked and trusted. Yes, compensation mattered, but I was willing to trade money for meaning.

Trusted Insight: Focusing on leadership and healthy culture and communication, what are your thoughts on the importance of a strong governance structure?

Wes Bradle: I think it's extremely important. Governance, which essentially defines rewards and consequences, drives behavior. Even if you manage to hire great people, if you don’t have proper alignment between all key decision-makers, the system will break down. It’s important to note that healthy governance doesn’t always mean more governance. There comes a point when too much governance bogs down decision-making and frustrates staff.

 

"Almost everything a public pension does is public and therefore subject to external scrutiny. What doesn’t get reported is how public pension LPs helped drive better alignment through the ILPA Principles or how they’ve tried to influence positive private equity regulation in Washington D.C."

And so to your question, good governance can help drive a healthy culture, whereas bad governance can be really stifling and demotivating for people. At Florida SBA, the executive director and the senior investment officer in private equity do a great job asking questions of the team, but also giving us a lot of autonomy. They trust but verify. This type of governance, combined with the right financial incentives, is really motivating.

Trusted Insight: These days there are private equity giants like SoftBank and Sequoia that are raising multi-billion dollar funds. What are your thoughts on these “mega funds” and how do you expect them to perform?

Wes Bradle: That's a great question. I think Warren Buffet said, "Price is what you pay and value is what you get." It's just hard to see how these mega growth equity funds can generate historical PE returns based on the prices paid. The growth rates required to generate attractive returns at these valuation levels are pretty large. For us, we've shifted more of our commitments to earlier stage VC and away from late-stage VC or growth, mainly because of where valuations are. I will say that if SoftBank or Sequoia's multi-billion dollar funds can invest large sums of money in the next Amazon or Google while avoiding the next Webvan or eToys.com, they'll probably do really well. I just wonder how many people in 2001 were investing in Amazon thinking it would be an almost trillion dollars market-cap company by 2018.

Another question is whether returns will compress when two competitors in a sector raise hundreds of millions of dollars to compete with each other. For example, there were three venture-backed companies in the pet-sitting business: Dog Vacay, Rover, and Wag. In 2017, Dog Vacay and Rover merged and people assumed the combined business would be the winner in the sector. In 2018, SoftBank invested $300 million in Wag. Now it appears the two companies will spend tons of money competing with each other for the next few years, which could negatively impact returns if the market isn’t as large as people think. All that being said, both of Sequoia and SoftBank have people who are way smarter than me and I wouldn’t bet against them!

Trusted Insight: A clear trend within the public pension industry is to reduce investment return assumptions. Are there any investment strategies that Florida SBA is pursuing to generate alpha and aid the funding gap that the pension industry is facing?

Wes Bradle: It's really tough in the current high valuation environment and there’s no silver bullet. We’re trying to stay disciplined in our pacing and make sure we diversify appropriately. I use this baseball team analogy all the time and I'm sure people are sick of hearing it, but imagine you had to field a baseball team and could pick from any players in the majors. Would you pick nine first basemen? No, you’d pick the one or two best players at each position. Our approach in choosing PE firms is similar. We want to get the best PE firms on the field in each sub-strategy within private equity.

That being said, we will make some tactical overweights or underweights based on market conditions. We’ve been overweight technology and overweight venture for the past 5-6 years, which has done well. More recently, we’ve tried to commit more capital to firms who will do well if there’s an economic downturn or if there’s more market volatility, like turnaround firms or hybrid firms who can oscillate between debt and equity. We’ve also tried to add firms who specialize in defensive sectors like healthcare or “out of favor” sectors like energy. Any manager we add to the portfolio though is expected to play a specific role.

Trusted Insight: What are your thoughts on buzzwords like machine learning and blockchain. Are those things that spark your interest?

Wes Bradle: I’m a believer in both machine learning and blockchain, but it also seems a little early for both technologies. Maybe a little bit like the internet in the late 90s: everyone could see the possibilities, but it took a decade longer than people thought for the technology to develop so that those possibilities could become realities. These two buzzwords seem to be very relevant for the portfolio companies within our private equity funds. It’s still early, but a lot of companies are excited about the potential of machine learning and to a lesser extent blockchain. Some of our PE firms are investing in machine learning and blockchain companies and are using machine learning technology or big data to enhance their sourcing efforts.

Trusted Insight: Is there a trend in recruiting individuals that have a GP background. Is this something you say has always been around or is this something relatively new?

Wes Bradle : I haven’t really seen it. Regardless of the background of the person, I think the most important determinant of success is a cultural fit. You can bring in someone with a GP background, but if they’re used to operating within a different organizational culture and don’t adapt, they’ll be ineffective. I’ve seen people with a GP background be really successful at public pensions and others who have not. I think how a person operates is just as important as what they’ve done.

When I interviewed at CalPERS, one person interviewing me said, “We can teach you how to benchmark a fund or build a pivot table, but we can't teach you how to be intellectually curious or how to be a good team player.” That was the culture at CalPERS when I joined. After a few years, new leadership came in and the culture changed dramatically. Hiring decisions became more about how many degrees or designations someone had or how many years of experience they had and less about cultural fit. I think education and experience matter, but only if a person can work effectively with the existing team. This experience showed me first-hand how culture drives behavior and team dynamics, which ultimately drives performance.

Trusted Insight: We covered a lot of ground, but is there something we may have missed in our conversation?

Wes Bradle: I guess two things come to mind. One is that people don't talk a lot about the consistency of commitment pacing in private equity, but I think it’s very important. You never know how long a cycle will last, so it’s important not be overexposed to private equity at the wrong time. It’s easy to commit too much capital during boom times. Disciplined commitment pacing forces you to only choose the best opportunities, which isn’t usually fun, but it’s usually right.

The second thing is that there seems to be a lot of negative bias towards public pension plans. A recent Pro Rata email newsletter said, “just because LPs should know something doesn't mean they do, and that goes triple for public pension LPs.” Yes, some public pension funds have challenges or have made mistakes in the past, but so have endowments, foundations, sovereign wealth funds, and other types of LPs. The difference is that almost everything a public pension does is public and therefore subject to external scrutiny. What doesn’t get reported is how public pension LPs helped drive better alignment through the ILPA Principles or how they’ve tried to influence positive private equity regulation in Washington D.C. I’ve seen plenty of public pension LPs press GPs on certain issues when no other LPs would speak up.

A few years ago, I had a GP ask for consent to increase the fund’s cap on recycled capital in order to invest more in a publicly traded company. At the advisory committee, I requested that the GP reduce the management fee rate for this recycled capital as my organization could invest in publicly traded companies at a much lower fee rate. When the GP asked other advisory committee members what they thought, the CIO from an Ivy League endowment said they were fine with the current, higher management fee rate. All things being equal, aren’t lower fees better than higher fees? My point is that there are plenty of smart, engaged people at public pensions who are doing a great job for their beneficiaries. I’ve met talented LPs from all types of organizations, including public pension plans, and I hope we can find a more balanced tone in the future.  

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The full list of 2018 Top 30 Public Pension Institutional Investors can be found here.