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Pensions Focusing On A 'More Direct Method Of Investing' | City Of San José | Brian Starr, Head Of Private Markets | Q&A

by trusted insight posted 2years ago 2509 views
Brian Starr joined the City of San José Retirement Services in June 2014. He serves as head of private markets after several years managing global fixed income and private debt. Prior to joining the City of San José, he spent three years at City and County of San Francisco, where he was an investment analyst and trader for the City’s $6 billion operational and surplus cash portfolio. 

In this interview, he discusses the cost-effectiveness of managing direct investment programs, the competitive advantages that the City of San José is finding in venture and why he believes the LP community should do a better job of sticking together.

Brian Starr was recently named on Trusted Insight's Top 30 Public Pension Institutional Investors.

Trusted Insight: How have your experiences before joining the public sector influenced your current day-to-day role?

Brian Starr: I joined an independent broker-dealer/investment advisor straight out of college, where I was able to evaluate mutual funds for placement in portfolios. That was also where my interest in private markets was born. Then, I joined a small family office/real estate private equity investor in the Bay Area and got to see, behind the scenes, how they looked at the world. Of course, it was a very interesting time to be looking at real estate in 2007.


"One of the things that could be happening... is whether or not the public displeasure with fees that pension funds pay will evolve into a more direct method of investing."

After that, life took a little bit of a detour. I had been dating the woman who would eventually become my wife, and she was from Eastern Europe. She lived in the U.S. and once her visa was up, she moved back home to Romania. I realized I needed to pursue that relationship, and moved to Romania as well. That was what you'd call your life-changing moment. Living in Romania was a super eye-opening experience in terms of understanding emerging markets, especially coming in with a U.S. education and living in an area that didn't have a lot of financial professionals. I was able to quickly establish myself within a local financial organization, and get experience working on some merchant banking style investments that the company had made.

I experienced the financial crisis from thousands of miles away. Ultimately, we wanted to come back to the U.S. It wasn’t the best time to try and get a finance job in the U.S., so I went to business school first before continuing my investment career, into the public sector.

Trusted Insight: After nearly a decade of serving at public institutions, what industry trends have you picked up on?

Brian Starr: One of the things that could be happening, and it's a little too soon to tell, is whether or not the public displeasure with fees that pension funds pay will evolve into a more direct method of investing. The Canadian plans really embrace direct investing and that's something that you haven’t seen in the U.S. There’s been an emphasis placed on grinding down fees. The cost-effectiveness of managing these direct investment programs is starting to get more discussion.

Trusted Insight: The City of San José is gearing up to invest and allocate more to venture capital. Are you looking to take advantage of your proximity to Silicon Valley?

Brian Starr: This is one of the initiatives that was very important to our new chief investment officer, Prabhu Palani. The idea is to capitalize on the access and information that we should have given our geography. We all appreciated, as we created this dedicated allocation to venture, that you don't just one day decide that you're going to invest, immediately become fully invested, and then you're wonderfully successful.


"For us, venture is one area where we think there are opportunities to develop a competitive advantage."

We've been very patient, methodically thinking through things from a strategic angle, and figuring out where we could have an edge. We understand that within venture, if you're not doing better than average then you're not getting paid an adequate return to justify the risk you're taking with your capital. Right now, we're still in the strategic stages. The strategic options are something that we'll bring to our boards, sometime in 2019.

Trusted Insight: Where else do you see the most appealing investment opportunities in the market?

Brian Starr: It's more a question of what are you going to do that's going to give you a strategic advantage in whatever you choose to invest in? This is for every investor. If you don't have a good answer to that question then you have to figure out if you’re going to be able to achieve a good risk-adjusted return. For us, venture is one area where we think there are opportunities to develop a competitive advantage. We are also acknowledging that our allocation in venture is roughly five percent of our plan. The outcome for our entire plan is hardly dependent on our success in that one small area.

Trusted Insight: Do buzzwords like machine learning, artificial intelligence and blockchain keep you up at night?

Brian Starr: I find all the new technologies that are coming out to be pretty interesting. One of the things that you can appreciate working within a public pension is that even when the rate of technology change is very fast, the overall economy and world is moving extremely slowly. While there's no question that some of these technologies will dramatically influence the way we live our lives, it's not something that keeps me up at night, because I know that the adoption is incremental. It’s the same as we’ve seen in computers and the internet.

Trusted Insight: What are your thoughts on the importance of governance structure?

Brian Starr: You have to start with the fact that the board is ultimately responsible for the plan. Those individuals who do it for a public pension perform that public service, with very little benefit to themselves. They're really doing it because they want to make a contribution. They have to choose a governance structure that they believe fulfills their fiduciary obligation well. They have to balance that structure with the amount of time that they can dedicate and their own experiences that they can contribute to the plans.


"We're really lucky at San José to live in a desirable area with a great talent pool and to have been able to attract really strong people."

I don't think that there's a one-size-fits-all aspect of governance. It's something that our plans have really been grappling with for nearly ten years, during which everything changed- from the composition of the boards changed to the composition of the investment team and the interaction between the two groups.

Alignment is a tough one, particularly in the public sector. The way that the private sector frequently achieves alignment is not really accessible because of the public perception on it. I think we have done a pretty good job of taking each piece of governance step-by-step and gradually going towards a system where the boards can rely on their investment professionals to make day-to-day decisions while maintaining good control over big picture issues.

Trusted Insight: What’s kept you going at public pensions? Considering the constraints associated with government entities.

Brian Starr: I think this is a job that anyone is super lucky to have. There are two things for me personally. Do I like the work I'm doing? Do I think it's making a positive impact on things? I can come to work and I'm constantly intellectually stimulated. I have to learn all sorts of new things, and I have a great responsibility to learn it and to execute at the highest level, with arguably fewer resources than people in the private sector. That serves my own interests, but also there are thousands of police officers, firefighters and public servants that are counting on having funds available for retirement. That's not going to happen there unless public pensions can staff people who can be competitive in global capital markets.

Another important thing to point out is the people that I work with. We're really lucky at San José to live in a desirable area with a great talent pool and to have been able to attract really strong people. We have coworkers you can rely on, and who you enjoy spending time with. Since you do spend the majority of your life effectively at work, for me, that's enough.

Trusted Insight: Any final thoughts?

Brian Starr: I believe the LP community could do a better job of sticking with each other. A lot of the bad behavior that we see on the GP side is partially our own doing. This is through the way that we compete for allocation or the mentality by which we approach our job. If we did a better job of collaborating, we could prevent some of these things that occur.

View our full catalog of interviews here

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