Dhvani Shah is the chief investment officer of Illinois Municipal Retirement Fund (IMRF), a pension fund with $34.9 billion assets under management. Previously, Shah was the managing director of private equity of the $89.9 billion New York State Teachers' Retirement System. Shah has a BBA from Loyola University and an MBA from the University of Chicago Booth School of Business.
IMRF currently allocates about $5 billion of capital in private markets and works with 40 external managers investing these assets, the majority of which are small and opportunistic funds. In this interview, Shah discusses IMRF’s approach in selecting these funds and the pension fund’s strategy to stand out in increasingly saturated private markets.
Ms. Shah was recently named on Trusted Insight’s 2017 Top 30 Women Chief Investment Officers. She graciously spoke with us on February 27.
Trusted Insight: Recently, several notable women chief investment officers across endowments, pension funds and family offices have resigned or retired. What does it mean to you to be one of the women thought leaders of the industry?
Dhvani Shah: To be a thought leader in the industry, to me, means being a good role model and mentoring talented individuals who are interested in their professional growth. That means developing tomorrow's leaders. I value sound judgment, ability to think critically and proactively. I believe in continuous learning and value intellectual curiosity. As a leader in the industry, it's important to demonstrate these traits as well as support the development of these traits in your staff.
Trusted Insight: When looking to hire a new staff member, how do you go about approaching the idea of diversity?
Dhvani Shah: Whenever I am speaking at various conferences, and specifically, I speak at many that are focused on diversity. I put the word out on IMRF. So that, when I have a position opening, I am able to attract talented staff. Once you attract talented staff, you need to have structure in place to retain and develop that talent. We support, for example, the CFA and CAIA programs, which facilitates professional development.
Trusted Insight: How does the IMRF strategy avoid a herd mentality in increasingly saturated private markets?
Dhvani Shah: We are differentiated based on our team approach and portfolio construction. For example, our private market program is monitored by a team of four professionals and includes real estate, private equity, agriculture and timber investments.
Monitoring this $5+ billion portfolio across about 40 firms gives this team breadth and depth when it comes to understanding the private market landscape. That is what allows us to take advantage of the market opportunity across the sub asset classes.
The second differentiator is our portfolio construction itself. We are thoughtful about what we add to our portfolio, so that we have time and capital for the investment managers in our portfolio. This approach differentiates us because most institutional private markets portfolios are much larger in terms of number of managers.
Trusted Insight: With that maturation, there is a push into different investment vehicles outside of the typical ten-year lock up, two-and-twenty model. Is that a fundamental shift in private markets away from two-and-twenty and toward a more tailored approach? Or are these just more tools in the toolbox?
Dhvani Shah: The institutional investor space has many different investment models. For the larger investors, this new trend in vehicles outside of the ten-year lock up and two-and-twenty model is another tool in the toolbox.
I do believe that the longer lock up periods and the carried interest model may pose an alignment of interest issue. From my perspective, the jury is out whether the new vehicles solve more problems than they create.
Trusted Insight: What potential problems might they create?
Dhvani Shah: In your typical private equity fund, with a European waterfall, you actually have a set of mechanisms for the carried interest calculations.
From my perspective, the jury is out whether the new vehicles solve more problems than they create.
But when it's a longer time period, such as a permanent vehicle, how is the carried interest calculated on an open-ended fund? Is it still based on divestments or on valuations over a time period? If it is the latter, the investor is still invested in the asset while the General Partner is getting carried interest.
Whether this alignment of interest is strong or not, really depends on the details of those vehicles. That is why I said that the jury is out because you really have to evaluate each of those strategies based on the mechanics with which some of these economics are being calculated.
Trusted Insight: You have only 40 managers on the private side. To what degree are you shifting away from some of those more monolithic, giant managers toward either a new manager or a niche strategy?
Dhvani Shah: To put our portfolio into perspective, we do have two evergreen separate accounts, where it's a manager program and then the remaining investments are made directly by staff, which is the portfolio of about 40 managers. Our evergreen separate account portfolios give us this broad exposure, and then what we do directly needs to be more opportunistic.
In our direct funds portfolio, we have venture capital, buyout, growth, credit and special situations. And yes, to date, we actually do not have any direct investments in the mega buyout fund.
Trusted Insight: What’s the rationale behind avoiding the larger funds with notable names? Is it a function of your AUM and average check size? Is it the fund’s being late in its lifecycle? Is it something else?
Dhvani Shah: We found that we already had exposure to the larger funds through our evergreen separate accounts and we decided to focus on the smaller and opportunistic funds.
Our strategy is also related to the check size that we write versus the size of the mega funds. We would prefer to have an advisory board seat. We would like to have a voice at the table. So the size of our equity might not be large enough to get that seat at the table, which would prevent us from investing in those mega buyout funds.
Trusted Insight: You’ve been at Illinois Municipal for a little more than five years now. How has your mindset, your approach toward the portfolio and markets evolved over that time?
Dhvani Shah: There are two major areas of difference. First one is that we now have a direct funds portfolio. Before I joined, there were no direct private equity fund investments. Second is the change in market landscape. There's always something new, whether it's new strategies or new vehicles. Five years ago, you would not have thought about some of these permanent fund vehicles in a private markets.
From the market landscape, some of the terms have changed to be more focused on transparency in the past few years. The market is definitely adapting to what it takes to stay relevant. The private markets landscape has become more mainstream.
I am even seeing more analytical tools than a couple decades ago. We were always doing your own cash flow modeling and attribution analysis, but now there are definitely more tools for due diligence as well as monitoring.
Trusted Insight: When there's rapid evolution of a market like you described, both long-term trends and fads will develop. How are you differentiating between them?
Dhvani Shah: I determine whether something is a fad or a long-term trend by evaluating the merits of the strategy and seeing if it stacks up to the fundamentals of investing but, only time will tell. Having investment conviction is important to be able to differentiate fad from trend.
Trusted Insight: The number and sophistication of capital allocators continues to grow. What challenges does that present to you or more broadly, to chief investment officers within the industry?
In this space, there's always this question: is there too much capital chasing too few good deals?
Dhvani Shah: In this space, there's always this question: is there too much capital chasing too few good deals? I think that's always been part of the evaluation of the strategy. I don't know if that is a new risk.
I do think that the one thing that has changed over the past couple of decades is alignment of interest between Limited Partners (LP). Normally, you think about GP-LP alignment. Now with different models and different investors, there are preferences of capital is deployed -- whether it's a commingled fund, co-investments, direct JVs with the manager, permanent vehicles. Now there are issues that you have to think about within LPs. Is an LPAC member voting in a certain manner because their firm owns a portion of the manager or has heavy co-invest deal flow from that manager?
Trusted Insight: How does Illinois Municipal differ from your peers?
Dhvani Shah: Our assumed rate of return is 7.5 percent. We beat that return on a five-year basis ending December 31, 2016, with our gross return of 9.52 percent and net return of 9.28 percent, versus a benchmark of 8.82 percent, based on preliminary data.
Why is that important? It allows us to invest per our strategic plan, and a long-term investor in the private markets asset class. You can be the attractive source of capital for those top-tier managers. Having strong organizational governance and funding stability has allowed us to deploy capital in the private market methodically. And we do become a premier LP that a manager would want capital from.
Trusted Insight: Private markets are all about access. How important is it to be seen as a premier LP?
Dhvani Shah: In my mind, that's our edge. We do not have a $300 million check to write for each fund. So, if you're not the largest check writer, then you need to be a unique, sound, and stable LP.
So, what makes us attractive? The way we formed our private markets team across asset classes also is unique because that means that IMRF team has a different viewpoint.
When I see a vehicle in the private equity side, I've actually seen some of those already on the real estate side. I'm talking mechanically. The open-ended core real estate vehicle sound a little similar to some of the things we were seeing on a private equity site. So, it's kind of interesting how you can pick some things from different asset classes and have a unique perspective.
And so at the end of the day, being a valued LP is attractive and important.
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