Darren Foreman is the senior portfolio manager of private markets and co-investments at the Pennsylvania Public School Employees' Retirement System (PSERS). He manages a successful in-house private equity co-investment program of 46 portfolio companies at top quartile performance. In this interview, he discusses why he has a preference for GPs with exposure to multiple countries in their investment strategy, the benefits of having a tenured private markets team and more insights.
Darren Foreman was recently named on Trusted Insight's 2019 Top 30 PE, VC Investors. This interview has been condensed.
Trusted Insight: Can you brief us on the Pennsylvania PSERS’ investment team and your role within it?
Darren Foreman: I work in the private markets team, and we currently have eight people that work in private markets. In private markets, we cover venture capital strategies, buyout strategies, special situations strategies and we have some exposure to secondary funds.
I've been at PSERS for 22 years. The last 16 years were focused on private markets. The pension fund currently has a NAV of $56 billion and private markets is 14.8% of the PSERS overall total fund, as of June 30, 2018.
Trusted Insight: Pennsylvania PSERS beat its 3-, 5- and 10-year return benchmark for alternative investments. What’s your strategy or approach for keeping that momentum?
Darren Foreman: Yes, good question. I always tell the team that when we make a commitment to a private market's manager (GP), they should offer us something unique and outstanding. By that, I mean a sector specialist, geographic specialist or a GP that has exceptional performance. You have to back GPs that have a proven ability to invest in certain sectors where they may have repeat investments with proven value-add strategies. I feel that's a better way to get better performance.
Having geographic expertise like a China fund, a Pan-Asian fund, or a Scandinavian fund can be beneficial. These geographies require local nationals that speak the language, know the culture and have connections to companies that are for sale. Outstanding performance is important because we are in a performance business. We need to have a high performing private markets program here at PSERS.
GPs don’t necessarily have to be top quartile, but they do have to perform well against a public comparable benchmark. We use a public market equivalent, or a PME to assess whether they have would have bested a public index or not.
Trusted Insight: Other pension peers mentioned they will likely be focusing more on direct investments because there’s an emphasis on grinding down fees. Is PSERS heading in that direction too?
Darren Foreman: I know some of the Canadian plans have done direct investing whereby they compete along with GPs for investments. I don't know how successful they have been. If by direct you mean co-investing where a manager will have some investment equity left over for co-investors such as PSERS to co-invest in a deal that the fund is investing in, then yes we do this form of direct investing.
We started our co-investment program back in 2012 and we've completed 47 co-investments, no management fee, no carry/profit share, (as of June 30, 2018). My supervisor Charles Spiller told me a couple weeks back that he believes it's the highest performing PSERS portfolio in the past five years. We have a 24.9% net IRR, so it's been very successful.
At first, we used a third party manager and we were paying them a 1% management fee, and 10% profit share. We just decided to bring it in-house back in 2012. Charlie and I have been here at PSERS for a long time and we felt we had the experience to be a successful co-investor. We're seeing a lot of good deal flow and it's been accretive performance wise. Having an internal co-investment program also helps lower our cost. If we can get this the NAV on this program up to a substantive level, say 10%-12% of the private market NAV, then that's going to help average down our cost.
Trusted Insight: You shared your outlook on private equity. Are you involved in PSERS’ next steps in venture capital investing?
Darren Foreman: PSERS does invest in venture capital funds. We're always on the lookout for exceptional funds no matter what their investment strategy is. One of the issues we have in venture capital is attaining a commitment that makes sense for us as that we like to invest $75 million at a minimum per fund. As you know, VC funds tend to be small funds. In that light, I don't know that we would make a $75 million commitment in any fund that was smaller than $250 million.
Even with the challenge of obtaining a commitment to a VC fund, we are on the lookout for outstanding venture capital funds. We have Patrick Knapp on the team, who is doing an excellent job of screening for potential VC funds. We have targeted some venture capital GPs that will be raising funds over the next 12-24 months that we are going to do due diligence on.
Trusted Insight: How difficult is it to select a great manager in a highly crowded and highly competitive space?
Darren Foreman: Yes, it is very challenging to select a great GP in private markets. Some of the attributes we diligence the investment professionals, the investment strategy, value-add employed and of course the track record. For example, we may ask some of the following questions. How have the prior funds done ? Have they shown a proven ability to exit investments? What can they get better at? Have they had success with platform companies where they are building a bigger better company? Have they had success changing the C-suite? Have they upgraded their CEO or CFO?
For example, we just had an update meeting with Platinum this morning, and they have a very big operations team that could go in and help their portfolio companies add value. GPs may have someone that understands the supply chain. GPs may have a capital markets team to help their underlying portfolio companies if they need to raise more debt, or if they want to do M&A in the future. There might be people within the GP that know China, and can assist their portfolio companies selling their products there. These GPs have individuals that really add value into the portfolio companies, and so we'll vet that.
We also want diversified portfolios. If a GP is raising a fund and had fewer than eight investments, we may deem that to be too risky. For the most part, portfolios that we have committed to in private markets have positions of 10 or greater. You get some diversification benefits at this amount. We also like GPs that invest a lot in their funds. Too often prior to the global financial crisis, GPs would send us in offering memorandums with only a 1% GP investment. We're looking for 2.5 percent or better because we want them to be convicted in what they're doing.
Trusted Insight: What other investment trends or verticals have you picked up in your 22+ years at a large public pension plan?
Darren Foreman: As we invest internationally, we do have a preference for GPs that have exposure to multiple countries in their investment strategy. For the most part, when we invest in Europe, Asia, etc., we are looking for a GP to have a diversified strategy as far as investing in various countries. For example, if a GP has a U.K. only investment mandate at the moment, it may be a difficult market with all this Brexit talk now which has created uncertainty. Whereas a pan-European manager could invest in France, Germany or somewhere in Scandinavia, so they still are seeing investment opportunities through geographic diversification.
One of the things we've done right here at PSERS in private markets is to focus on the middle market with our buyout commitments. We still may invest in a large or mega market type fund. However, we like the middle market because one of the exit options they have is being able to sell a portfolio company to a larger fund. A small market or middle market GP isn’t limited to just an IPO at exit or selling to a strategic. Having these three exit modes is a very good attribute of the small and mid-market funds.
Those two things come to mind right away as far as lessons learned or thoughts about what works in private markets.
Trusted Insight: What’s kept you grounded at PSERS? Considering the red tape associated with government entities.
Darren Foreman: That's a great question. We actually have three people in private markets that have been here for 20 plus years. That would be Charles Spiller, Luke Jacobs and myself. One of the nice attributes is that it's been a great environment here for, staff and me, it's like working in the private industry. There's always a lot of work to do.
I’m driven to find the best investment opportunities, whether it's a fund commitment or a potential co-investment (where I’m the deal quarterback for deals). You also know that you're doing a very good public service for the beneficiaries too. Our team is driven to achieving the same goal. We have such a performance-oriented team.
As long as that type of environment still exists, and we don't get too many headwinds politically, I believe people will stay and want to work here. It's been a great organization to work for over the years.
Trusted Insight: Is there anything that we failed to ask about, PSERS or private equity landscape?
Darren Foreman: I would say one of the other keys for PSERS is the size of the commitments we make. This size (generally $75M and greater) permits us to get a seat on limited partner advisory committees. An advisory board seat gives you an inside look at the general partner. It allows you in the group setting to see how that general partner operates and how the team operates. It gives you opportunities to ask good questions.
The fact that we're advisory committee members, we've built those relations with these general partners around the world, has its benefits. It's not just that we are good stewards for the pensioners, and investment professionals. We also have to market ourselves to these general partners so we can see good co-investment deal flow. From being on an advisory committee to investing a good amount of money, $75 million and higher in most cases, we've been around a long time. All those things have allowed us to have a top performing private markets program.
View our full catalog of interviews here.
The full list of 2019 Top 30 PE, VC Investors can be found here.
Darren Foreman was recently named on Trusted Insight's 2019 Top 30 PE, VC Investors. This interview has been condensed.
Trusted Insight: Can you brief us on the Pennsylvania PSERS’ investment team and your role within it?
Darren Foreman: I work in the private markets team, and we currently have eight people that work in private markets. In private markets, we cover venture capital strategies, buyout strategies, special situations strategies and we have some exposure to secondary funds.
"Having geographic expertise like a China fund, a Pan-Asian fund, or a Scandinavian fund can be beneficial. These geographies require local nationals that speak the language, know the culture and have connections to companies that are for sale."
I've been at PSERS for 22 years. The last 16 years were focused on private markets. The pension fund currently has a NAV of $56 billion and private markets is 14.8% of the PSERS overall total fund, as of June 30, 2018.
Trusted Insight: Pennsylvania PSERS beat its 3-, 5- and 10-year return benchmark for alternative investments. What’s your strategy or approach for keeping that momentum?
Darren Foreman: Yes, good question. I always tell the team that when we make a commitment to a private market's manager (GP), they should offer us something unique and outstanding. By that, I mean a sector specialist, geographic specialist or a GP that has exceptional performance. You have to back GPs that have a proven ability to invest in certain sectors where they may have repeat investments with proven value-add strategies. I feel that's a better way to get better performance.
Having geographic expertise like a China fund, a Pan-Asian fund, or a Scandinavian fund can be beneficial. These geographies require local nationals that speak the language, know the culture and have connections to companies that are for sale. Outstanding performance is important because we are in a performance business. We need to have a high performing private markets program here at PSERS.
"My supervisor Charles Spiller told me a couple weeks back that he believes it's the highest performing PSERS portfolio in the past five years. We have a 24.9% net IRR, so it's been very successful."
GPs don’t necessarily have to be top quartile, but they do have to perform well against a public comparable benchmark. We use a public market equivalent, or a PME to assess whether they have would have bested a public index or not.
Trusted Insight: Other pension peers mentioned they will likely be focusing more on direct investments because there’s an emphasis on grinding down fees. Is PSERS heading in that direction too?
Darren Foreman: I know some of the Canadian plans have done direct investing whereby they compete along with GPs for investments. I don't know how successful they have been. If by direct you mean co-investing where a manager will have some investment equity left over for co-investors such as PSERS to co-invest in a deal that the fund is investing in, then yes we do this form of direct investing.
We started our co-investment program back in 2012 and we've completed 47 co-investments, no management fee, no carry/profit share, (as of June 30, 2018). My supervisor Charles Spiller told me a couple weeks back that he believes it's the highest performing PSERS portfolio in the past five years. We have a 24.9% net IRR, so it's been very successful.
"We actually have three people in private markets that have been here for 20 plus years. That would be Charles Spiller, Luke Jacobs and myself."
At first, we used a third party manager and we were paying them a 1% management fee, and 10% profit share. We just decided to bring it in-house back in 2012. Charlie and I have been here at PSERS for a long time and we felt we had the experience to be a successful co-investor. We're seeing a lot of good deal flow and it's been accretive performance wise. Having an internal co-investment program also helps lower our cost. If we can get this the NAV on this program up to a substantive level, say 10%-12% of the private market NAV, then that's going to help average down our cost.
Trusted Insight: You shared your outlook on private equity. Are you involved in PSERS’ next steps in venture capital investing?
Darren Foreman: PSERS does invest in venture capital funds. We're always on the lookout for exceptional funds no matter what their investment strategy is. One of the issues we have in venture capital is attaining a commitment that makes sense for us as that we like to invest $75 million at a minimum per fund. As you know, VC funds tend to be small funds. In that light, I don't know that we would make a $75 million commitment in any fund that was smaller than $250 million.
Even with the challenge of obtaining a commitment to a VC fund, we are on the lookout for outstanding venture capital funds. We have Patrick Knapp on the team, who is doing an excellent job of screening for potential VC funds. We have targeted some venture capital GPs that will be raising funds over the next 12-24 months that we are going to do due diligence on.
Trusted Insight: How difficult is it to select a great manager in a highly crowded and highly competitive space?
Darren Foreman: Yes, it is very challenging to select a great GP in private markets. Some of the attributes we diligence the investment professionals, the investment strategy, value-add employed and of course the track record. For example, we may ask some of the following questions. How have the prior funds done ? Have they shown a proven ability to exit investments? What can they get better at? Have they had success with platform companies where they are building a bigger better company? Have they had success changing the C-suite? Have they upgraded their CEO or CFO?
For example, we just had an update meeting with Platinum this morning, and they have a very big operations team that could go in and help their portfolio companies add value. GPs may have someone that understands the supply chain. GPs may have a capital markets team to help their underlying portfolio companies if they need to raise more debt, or if they want to do M&A in the future. There might be people within the GP that know China, and can assist their portfolio companies selling their products there. These GPs have individuals that really add value into the portfolio companies, and so we'll vet that.
We also want diversified portfolios. If a GP is raising a fund and had fewer than eight investments, we may deem that to be too risky. For the most part, portfolios that we have committed to in private markets have positions of 10 or greater. You get some diversification benefits at this amount. We also like GPs that invest a lot in their funds. Too often prior to the global financial crisis, GPs would send us in offering memorandums with only a 1% GP investment. We're looking for 2.5 percent or better because we want them to be convicted in what they're doing.
Trusted Insight: What other investment trends or verticals have you picked up in your 22+ years at a large public pension plan?
Darren Foreman: As we invest internationally, we do have a preference for GPs that have exposure to multiple countries in their investment strategy. For the most part, when we invest in Europe, Asia, etc., we are looking for a GP to have a diversified strategy as far as investing in various countries. For example, if a GP has a U.K. only investment mandate at the moment, it may be a difficult market with all this Brexit talk now which has created uncertainty. Whereas a pan-European manager could invest in France, Germany or somewhere in Scandinavia, so they still are seeing investment opportunities through geographic diversification.
One of the things we've done right here at PSERS in private markets is to focus on the middle market with our buyout commitments. We still may invest in a large or mega market type fund. However, we like the middle market because one of the exit options they have is being able to sell a portfolio company to a larger fund. A small market or middle market GP isn’t limited to just an IPO at exit or selling to a strategic. Having these three exit modes is a very good attribute of the small and mid-market funds.
Those two things come to mind right away as far as lessons learned or thoughts about what works in private markets.
Trusted Insight: What’s kept you grounded at PSERS? Considering the red tape associated with government entities.
Darren Foreman: That's a great question. We actually have three people in private markets that have been here for 20 plus years. That would be Charles Spiller, Luke Jacobs and myself. One of the nice attributes is that it's been a great environment here for, staff and me, it's like working in the private industry. There's always a lot of work to do.
I’m driven to find the best investment opportunities, whether it's a fund commitment or a potential co-investment (where I’m the deal quarterback for deals). You also know that you're doing a very good public service for the beneficiaries too. Our team is driven to achieving the same goal. We have such a performance-oriented team.
As long as that type of environment still exists, and we don't get too many headwinds politically, I believe people will stay and want to work here. It's been a great organization to work for over the years.
Trusted Insight: Is there anything that we failed to ask about, PSERS or private equity landscape?
Darren Foreman: I would say one of the other keys for PSERS is the size of the commitments we make. This size (generally $75M and greater) permits us to get a seat on limited partner advisory committees. An advisory board seat gives you an inside look at the general partner. It allows you in the group setting to see how that general partner operates and how the team operates. It gives you opportunities to ask good questions.
The fact that we're advisory committee members, we've built those relations with these general partners around the world, has its benefits. It's not just that we are good stewards for the pensioners, and investment professionals. We also have to market ourselves to these general partners so we can see good co-investment deal flow. From being on an advisory committee to investing a good amount of money, $75 million and higher in most cases, we've been around a long time. All those things have allowed us to have a top performing private markets program.
View our full catalog of interviews here.
The full list of 2019 Top 30 PE, VC Investors can be found here.