Jared Speicher is the head of private equity and private credit for the $75+ billion pension plan for the State of New Jersey where he manages a globally diversified $13+ billion portfolio of primary funds, separate accounts, and co-investment across private equity and private credit.
In this interview, he discussed how their increased allocation to private markets is a performance enhancer, how investors can benefit from riding out short-term market volatility, and the importance of risk-mitigating strategies to help preserve capital during market drawdowns.
Jared Speicher was named to Trusted Insight's 2020 Top Private Credit Institutional Investors.
Trusted Insight: Tell us about your role at the State of New Jersey.
Jared Speicher: We use an allocator model within alternative investments across five buckets: private equity, private credit, real estate, real assets, and risk-mitigating strategies. My role is to lead our private equity and private credit investing, including strategic planning, portfolio construction and oversight of manager selection, due diligence, and ongoing monitoring. Our team is made up of a combination of specialists and generalists, but in total, I oversee nine people that have at least some responsibility for private equity and private credit.
The private equity and private credit portfolios together amount to around $13 billion and are invested globally across buyout, growth, venture, distressed, mezz, direct lending, special situations, specialty finance, and opportunistic and structured credit. We invest through commingled funds, fund of funds and separate accounts, and also do co-invest.
Trusted Insight: We hear a lot about LPs focusing more and more on private equity, private credit, and other private investments. Has that been the case with you guys?
Jared Speicher: That's a very timely question. Earlier this year, the State Investment Council, our governing oversight board, approved a change to our target asset allocation whereby the target allocation to our private market asset classes was increased. For the portfolios I oversee, private equity went from 12% to 13%, while private credit went from 6% to 8%. We have an actuarially assumed return target on a glide path from 7.5% to 7%. But even at 7%, that is a tough bogey to hit in this low-interest-rate environment. We view private investments as a return enhancer, and that view has contributed to our increased allocations to private markets.
Trusted Insight: What makes the private and alternative credit asset classes attractive? Why should your investor peers explore there?
Jared Speicher: Fundamentally, as I mentioned with the previous question, the private markets allocation at the State of NJ pension serves as a performance enhancer in our portfolio. And given the low-interest-rate environment, private markets serve an important role in meeting actuarially assumed rates of return. So that is certainly a key consideration. Beyond that, there are several other factors that should make private investments interesting to investors. A simple reason is that private markets expand the universe of investable opportunities beyond what is available in the public markets.
Reduced volatility is another advantage of private markets. A lot of cynics decry lower volatility in private markets as being misleading, since it isn’t marked-to-market daily. In my view, daily public market volatility is not reflective of reality. Take for example public BDCs, which are essentially a publicly-traded portfolio of leveraged loans, which can trade at either a discount or premium to NAV. BDCs traded down dramatically during the depths of the coronavirus pandemic. The Wells Fargo BDC Index was down more than 50% peak-to-trough during that period, surpassing the drawdowns in the broader equity markets, despite representing a diversified portfolio of senior secured loans. Conversely, a private portfolio of those same leveraged loans would have been marked down less than 10%. The volatility experienced by public BDCs is not reflective of the true volatility of a diversified portfolio of leveraged loans.
This brings us to another advantage of private investing, which is illiquidity premiums. If an investor can afford to keep a certain portion of their portfolio illiquid, not only will they avoid daily mark-to-market volatility, but they will also be compensated for doing so. Most likely, the periods when liquidity is in highest demand (such as during the depths of the coronavirus pandemic) are also the periods when prices are most depressed. If an investor can afford to ride out short-term market volatility, or better yet, be a provider of liquidity at those depressed prices, then they will benefit over the long-term.
A fourth advantage is that private markets are less efficient than public markets and so there are more opportunities to create alpha, both at the underlying security level as well as the manager selection level. In private credit, speed and complexity premiums can be earned by dealing with borrowers and issues that are below the radar of the banks or are not appropriate for the broadly syndicated loan market. Borrowers are willing to pay a premium for speed and certainty and for lenders willing to deal with complexity, and those premiums accrue to the investor.
In closing, a broader universe of opportunities, reduced volatility, illiquidity premiums, and enhanced alpha generation are some reasons to invest in private markets.
Trusted Insight: How important is risk management in the asset classes you oversee and at the total portfolio level? LPs frequently mention the importance of risk management.
Jared Speicher: I think about risk management at three levels. First, on a micro basis, for each individual investment we consider, we examine the potential risks as well as potential offsetting mitigating factors. Second, at the private credit level, we think about risk management from a top-down perspective in terms of constructing a portfolio diversified across risk exposures (leverage, sector, geography, size, vintage year, sub-strategy, GP, etc.). Third, at the overall pension fund level, in addition to broad diversification, we also have a target allocation to risk-mitigating strategies, which are intended to provide some protection in the event of an extreme market drawdown.
The role of risk-mitigating strategies at the overall pension fund level is going to be a function of the cash flow profile and funded status of the plan. For NJ, we are in a net negative cash flow position (meaning annual payments to beneficiaries exceed annual contributions) and a low funded status. In such a scenario, the specter of having to lock in losses during a market downturn to fund benefit obligations is very scary. Unfortunately, there is no magic bullet to solve for this potentiality. That is why it is important to build out a diversified portfolio, optimize the risk/return trade-off, and have an allocation to risk-mitigating strategies, all of which are intended to preserve capital during a market drawdown. We are thoughtful about the role of risk management throughout our investment process and up and down the portfolio.
Trusted Insight: We hear of challenges where peers are underfunded. Apart from that, being a government entity, are there any challenges faced throughout the investment process?
Jared Speicher: The issue of being underfunded is a challenge. It's more of a challenge for the policymakers. In terms of the investment staff, on a day-to-day basis, regardless of the funded status, we're still trying to pick the best investments, construct diversified portfolios, and seek attractive risk-adjusted returns.
Aside from funded status, I believe U.S. public pensions face three main challenges. One is retaining talent, which can be a function of geography and compensation. In NJ, we are competing in the same talent pool as the center of the global investment industry (in New York City), so there is no shortage of options for talent to choose from. Meanwhile, despite living in one of the most expensive parts of the country, our total comp is below our public pension plan peers, a universe that tends to be among the lower paying investment jobs in the first place. While retention is an uphill battle, we focus on the work-life balance and job opportunities available working at the State of NJ pension.
The second challenge is a lack of technological resources. Cumbersome procurement processes and stretched budgets often mean U.S. public pension plans are behind the technology curve. And with the speed at which technology innovates and advances, U.S. public pension plans struggle to catch up. That stated, we are currently in the process of a major upgrade to our technology infrastructure.
The third challenge is related to governance and bureaucracy. This has implications on the stability of long-term strategic plans, which is particularly relevant for private markets as they are long-term asset classes. But it also has implications on near-term manager selection, as NJ requires all private markets investments above a certain threshold be presented to the State Investment Council prior to investment.
Those are probably the three challenges that we face as a government entity that impact the investment process. There are, of course, also advantages to working at a public pension plan like NJ.
Trusted Insight: In the last few years you hear buzzwords like AI and machine learning in the investment process. Are there any investment themes or strategies that the organization (or yourself) are trying to get a better grasp of?
Jared Speicher: That's an interesting one. We're focused on doing what we think we're good at. I think it’s important to identify what your organizational capabilities are, and to stay within your circle of competency. To date, things like AI and machine learning are not things that we've brought in-house, although we are invested with managers that invest in things like AI and machine learning.
Given the size of the State of NJ pension, and some of the governance and bureaucracy issues I mentioned before, we focus on identifying managers that we can outsource being tactical to; who can invest on our behalf and be opportunistic across geographies, sectors, and themes.
Another thing that we're focused on, which is a buzzword out there, is co-investing. Co-investing helps us from a lot of different perspectives. On the one hand, it reduces fees, which is a critical factor for a public pension. But it also helps us mitigate the blind pool risk normally associated with private investments. We negotiate discretion through separate accounts and that allows us to better manage our portfolio exposures and capital deployment pacing in real-time. Co-investing also helps us better understand managers and their investment process, which is useful in sourcing and underwriting potential future investments. Overall, co-investing provides a lot of benefits to us.
Trusted Insight: Is being an asset allocator tougher now that the world has gone digital/virtual? How has your experience been, given everything that's going on?
Jared Speicher: That's a good question. It's pushed the focus even more so on re-upping with existing managers. In general, managers are still out there marketing; I don't think that's really stopped. We still get lots of inbound solicitations and you still hear about new managers coming to market. We have also seen managers asking for extensions of time, related to economic uncertainty caused by coronavirus, but also related to delays in conducting due diligence due to travel restrictions. We’ve seen requests from managers to extend fundraising periods, investment periods, fund life terms, and so forth. For the most part, I think investors have been understanding of those requests, although they each need to be evaluated individually.
It’s a lot harder getting comfortable with managers we’ve never met in this virtual world. It just underscores the importance of having a robust pipeline of managers. In this environment, if we are having our first touchpoint virtually, it is going to be difficult to get to the finish line. It's hard to justify giving someone hundreds of millions of dollars if you've never even met them or been to their office. We do work with consultants, and I imagine a lot of big institutional investors also work with consultants. The consultants are helpful, because the consultants may have relationships with managers we don’t and may have done site visits with managers we haven’t, so that can help us get more comfortable.
Another dynamic is annual meetings and conferences, which have either been cancelled, postponed, or moved to virtual. The virtual format has its advantages for a cost-conscious plan like the State of NJ. Travel time and costs are reduced, which enables us to have more people participate than we may otherwise. On the flip side, I find the networking is severely diminished. For me, meeting other investors is a key part of attending these events, and it is just not the same experience when the events are virtual. I don’t think the content delivery has really suffered by moving virtual, but the networking certainly has.
And of course, we have the issue of all working remotely from home. This is no different for allocators than it is for any other industry, but as a governmental entity we were never set up to work remotely in the first place. That has been a challenge for us, but I’ve been impressed with the way we’ve responded.
Some things are harder, and some things are easier, but in my experience, overall, it is more difficult being an allocator in this virtual environment.
View our full catalog of interviews here.
The full list of 2020 Top Private Credit Institutional Investors can be found here.
In this interview, he discussed how their increased allocation to private markets is a performance enhancer, how investors can benefit from riding out short-term market volatility, and the importance of risk-mitigating strategies to help preserve capital during market drawdowns.
Jared Speicher was named to Trusted Insight's 2020 Top Private Credit Institutional Investors.
Trusted Insight: Tell us about your role at the State of New Jersey.
Jared Speicher: We use an allocator model within alternative investments across five buckets: private equity, private credit, real estate, real assets, and risk-mitigating strategies. My role is to lead our private equity and private credit investing, including strategic planning, portfolio construction and oversight of manager selection, due diligence, and ongoing monitoring. Our team is made up of a combination of specialists and generalists, but in total, I oversee nine people that have at least some responsibility for private equity and private credit.
"We view private investments as a return enhancer, and that view has contributed to our increased allocations to private markets."
The private equity and private credit portfolios together amount to around $13 billion and are invested globally across buyout, growth, venture, distressed, mezz, direct lending, special situations, specialty finance, and opportunistic and structured credit. We invest through commingled funds, fund of funds and separate accounts, and also do co-invest.
Trusted Insight: We hear a lot about LPs focusing more and more on private equity, private credit, and other private investments. Has that been the case with you guys?
Jared Speicher: That's a very timely question. Earlier this year, the State Investment Council, our governing oversight board, approved a change to our target asset allocation whereby the target allocation to our private market asset classes was increased. For the portfolios I oversee, private equity went from 12% to 13%, while private credit went from 6% to 8%. We have an actuarially assumed return target on a glide path from 7.5% to 7%. But even at 7%, that is a tough bogey to hit in this low-interest-rate environment. We view private investments as a return enhancer, and that view has contributed to our increased allocations to private markets.
Trusted Insight: What makes the private and alternative credit asset classes attractive? Why should your investor peers explore there?
Jared Speicher: Fundamentally, as I mentioned with the previous question, the private markets allocation at the State of NJ pension serves as a performance enhancer in our portfolio. And given the low-interest-rate environment, private markets serve an important role in meeting actuarially assumed rates of return. So that is certainly a key consideration. Beyond that, there are several other factors that should make private investments interesting to investors. A simple reason is that private markets expand the universe of investable opportunities beyond what is available in the public markets.
"If an investor can afford to ride out short-term market volatility, or better yet, be a provider of liquidity at those depressed prices, then they will benefit over the long-term."
Reduced volatility is another advantage of private markets. A lot of cynics decry lower volatility in private markets as being misleading, since it isn’t marked-to-market daily. In my view, daily public market volatility is not reflective of reality. Take for example public BDCs, which are essentially a publicly-traded portfolio of leveraged loans, which can trade at either a discount or premium to NAV. BDCs traded down dramatically during the depths of the coronavirus pandemic. The Wells Fargo BDC Index was down more than 50% peak-to-trough during that period, surpassing the drawdowns in the broader equity markets, despite representing a diversified portfolio of senior secured loans. Conversely, a private portfolio of those same leveraged loans would have been marked down less than 10%. The volatility experienced by public BDCs is not reflective of the true volatility of a diversified portfolio of leveraged loans.
This brings us to another advantage of private investing, which is illiquidity premiums. If an investor can afford to keep a certain portion of their portfolio illiquid, not only will they avoid daily mark-to-market volatility, but they will also be compensated for doing so. Most likely, the periods when liquidity is in highest demand (such as during the depths of the coronavirus pandemic) are also the periods when prices are most depressed. If an investor can afford to ride out short-term market volatility, or better yet, be a provider of liquidity at those depressed prices, then they will benefit over the long-term.
A fourth advantage is that private markets are less efficient than public markets and so there are more opportunities to create alpha, both at the underlying security level as well as the manager selection level. In private credit, speed and complexity premiums can be earned by dealing with borrowers and issues that are below the radar of the banks or are not appropriate for the broadly syndicated loan market. Borrowers are willing to pay a premium for speed and certainty and for lenders willing to deal with complexity, and those premiums accrue to the investor.
In closing, a broader universe of opportunities, reduced volatility, illiquidity premiums, and enhanced alpha generation are some reasons to invest in private markets.
Trusted Insight: How important is risk management in the asset classes you oversee and at the total portfolio level? LPs frequently mention the importance of risk management.
Jared Speicher: I think about risk management at three levels. First, on a micro basis, for each individual investment we consider, we examine the potential risks as well as potential offsetting mitigating factors. Second, at the private credit level, we think about risk management from a top-down perspective in terms of constructing a portfolio diversified across risk exposures (leverage, sector, geography, size, vintage year, sub-strategy, GP, etc.). Third, at the overall pension fund level, in addition to broad diversification, we also have a target allocation to risk-mitigating strategies, which are intended to provide some protection in the event of an extreme market drawdown.
"It is important to build out a diversified portfolio, optimize the risk/return trade-off, and have an allocation to risk-mitigating strategies, all of which are intended to preserve capital during a market drawdown."
The role of risk-mitigating strategies at the overall pension fund level is going to be a function of the cash flow profile and funded status of the plan. For NJ, we are in a net negative cash flow position (meaning annual payments to beneficiaries exceed annual contributions) and a low funded status. In such a scenario, the specter of having to lock in losses during a market downturn to fund benefit obligations is very scary. Unfortunately, there is no magic bullet to solve for this potentiality. That is why it is important to build out a diversified portfolio, optimize the risk/return trade-off, and have an allocation to risk-mitigating strategies, all of which are intended to preserve capital during a market drawdown. We are thoughtful about the role of risk management throughout our investment process and up and down the portfolio.
Trusted Insight: We hear of challenges where peers are underfunded. Apart from that, being a government entity, are there any challenges faced throughout the investment process?
Jared Speicher: The issue of being underfunded is a challenge. It's more of a challenge for the policymakers. In terms of the investment staff, on a day-to-day basis, regardless of the funded status, we're still trying to pick the best investments, construct diversified portfolios, and seek attractive risk-adjusted returns.
Aside from funded status, I believe U.S. public pensions face three main challenges. One is retaining talent, which can be a function of geography and compensation. In NJ, we are competing in the same talent pool as the center of the global investment industry (in New York City), so there is no shortage of options for talent to choose from. Meanwhile, despite living in one of the most expensive parts of the country, our total comp is below our public pension plan peers, a universe that tends to be among the lower paying investment jobs in the first place. While retention is an uphill battle, we focus on the work-life balance and job opportunities available working at the State of NJ pension.
The second challenge is a lack of technological resources. Cumbersome procurement processes and stretched budgets often mean U.S. public pension plans are behind the technology curve. And with the speed at which technology innovates and advances, U.S. public pension plans struggle to catch up. That stated, we are currently in the process of a major upgrade to our technology infrastructure.
The third challenge is related to governance and bureaucracy. This has implications on the stability of long-term strategic plans, which is particularly relevant for private markets as they are long-term asset classes. But it also has implications on near-term manager selection, as NJ requires all private markets investments above a certain threshold be presented to the State Investment Council prior to investment.
Those are probably the three challenges that we face as a government entity that impact the investment process. There are, of course, also advantages to working at a public pension plan like NJ.
Trusted Insight: In the last few years you hear buzzwords like AI and machine learning in the investment process. Are there any investment themes or strategies that the organization (or yourself) are trying to get a better grasp of?
Jared Speicher: That's an interesting one. We're focused on doing what we think we're good at. I think it’s important to identify what your organizational capabilities are, and to stay within your circle of competency. To date, things like AI and machine learning are not things that we've brought in-house, although we are invested with managers that invest in things like AI and machine learning.
Given the size of the State of NJ pension, and some of the governance and bureaucracy issues I mentioned before, we focus on identifying managers that we can outsource being tactical to; who can invest on our behalf and be opportunistic across geographies, sectors, and themes.
Another thing that we're focused on, which is a buzzword out there, is co-investing. Co-investing helps us from a lot of different perspectives. On the one hand, it reduces fees, which is a critical factor for a public pension. But it also helps us mitigate the blind pool risk normally associated with private investments. We negotiate discretion through separate accounts and that allows us to better manage our portfolio exposures and capital deployment pacing in real-time. Co-investing also helps us better understand managers and their investment process, which is useful in sourcing and underwriting potential future investments. Overall, co-investing provides a lot of benefits to us.
Trusted Insight: Is being an asset allocator tougher now that the world has gone digital/virtual? How has your experience been, given everything that's going on?
Jared Speicher: That's a good question. It's pushed the focus even more so on re-upping with existing managers. In general, managers are still out there marketing; I don't think that's really stopped. We still get lots of inbound solicitations and you still hear about new managers coming to market. We have also seen managers asking for extensions of time, related to economic uncertainty caused by coronavirus, but also related to delays in conducting due diligence due to travel restrictions. We’ve seen requests from managers to extend fundraising periods, investment periods, fund life terms, and so forth. For the most part, I think investors have been understanding of those requests, although they each need to be evaluated individually.
It’s a lot harder getting comfortable with managers we’ve never met in this virtual world. It just underscores the importance of having a robust pipeline of managers. In this environment, if we are having our first touchpoint virtually, it is going to be difficult to get to the finish line. It's hard to justify giving someone hundreds of millions of dollars if you've never even met them or been to their office. We do work with consultants, and I imagine a lot of big institutional investors also work with consultants. The consultants are helpful, because the consultants may have relationships with managers we don’t and may have done site visits with managers we haven’t, so that can help us get more comfortable.
Another dynamic is annual meetings and conferences, which have either been cancelled, postponed, or moved to virtual. The virtual format has its advantages for a cost-conscious plan like the State of NJ. Travel time and costs are reduced, which enables us to have more people participate than we may otherwise. On the flip side, I find the networking is severely diminished. For me, meeting other investors is a key part of attending these events, and it is just not the same experience when the events are virtual. I don’t think the content delivery has really suffered by moving virtual, but the networking certainly has.
And of course, we have the issue of all working remotely from home. This is no different for allocators than it is for any other industry, but as a governmental entity we were never set up to work remotely in the first place. That has been a challenge for us, but I’ve been impressed with the way we’ve responded.
Some things are harder, and some things are easier, but in my experience, overall, it is more difficult being an allocator in this virtual environment.
View our full catalog of interviews here.
The full list of 2020 Top Private Credit Institutional Investors can be found here.
