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Institutional Investor Profile: Sheryl Schwartz, Managing Director of the Alternative Investment Group, TIAA-CREF29/06/2005. Source: AltAssets. 
Sheryl Schwartz on how to get into the best funds, on diversification, and on why excellent time management is the key to success in this business. In her 18 years with TIAA-CREF Schwartz has worked in five different areas: she started off in privately-placed debt and then went on to work in asset-backed securities before she started TIAA-CREF's secondary trading desk. Schwartz then worked in mortgage-backed securities. In 1997 she started the Alternative Investment Group. TIAA-CREF is a financial services provider that consists of a group of companies including Teachers Insurance and Annuity Association, College Retirement Equities Fund and various affiliates. TIAA-CREF is not a public pension fund, as many people believe. The organisation operates in a much wider spectrum and offers services such as private pension plans, real estate investment funds and retail mutual funds in addition to it's private equity activities.
TIAA-CREF has $340bn of assets under management, and the Alternative Investment Group has commitments of close to $5bn, of which $1bn have been drawn down. The Group invests between $20-200m per private equity or venture capital fund, with an average of $65m. Historically the average bite size was only $30m but that has increased as, over time, their knowledge and comfort within the asset class increased and their access to top performing funds improved. The Alternative Investment Group makes between 20 and 25 fund commitments a year and also about ten to 15 co-investments.
Why did you set up the Alternative Investment Group?
'The reason for starting the Group was that we were looking for capital gains and, at the same time, we were also looking for diversification within the general account portfolio. The Group focuses primarily on private equity and distressed debt funds.'
How has your strategy evolved since you started out in 1997?
'When we first started the Group we were mostly reacting to opportunities brought to us but now we are more proactive. That means, we primarily invest with groups that we have targeted and identified as the ones we want to invest with. We have identified almost all of our new commitments well in advance of fundraising, and we cultivate a relationship with the GPs for a few years before we invest with them.
We have about twenty per cent of our commitments in venture capital. Based on our current pipeline, at the end of this year we will have 28 per cent in large buy-outs, 25 per cent in smaller and medium-sized buy-outs, 18 per cent in venture capital, 14 per cent in distressed debt and secondary funds, five per cent in timber funds, and three per cent in energy funds. In our history, venture used to be a larger percentage and large buy-outs used to be a smaller percentage. The shift was primarily a function of opportunity. Currently there are fewer top-quality venture capital funds out fundraising, and usually it is hard to get a large allocation in them. Our commitments per venture capital fund are usually $20m, whereas our commitments to the large buy-out funds are between $100m and $200m.'
How big is your team?
'Our team has six investment professionals, all based in New York. In the future we may have another investment professional based in one of TIAA-CREF's other offices.'
How do you find out about good investment opportunities?
'We have our annual investment plan but we are always open if a good opportunity comes along. We source primarily by networking with existing relationships and with other LPs to find out who are the best players. Then we contact the ones with a good reputation and follow them for a few years before we invest with them.'
What is your allocation?
'In general, we prefer diversified funds. They form the majority of our portfolio, although we also have some telecoms and some healthcare funds.
In terms of geography, we invest about 60 per cent in the United States and 40 per cent internationally. The 40 per cent consist of two thirds pan-European funds and the rest are funds specialised in emerging and other markets. As for Europe, most of our funds focus on buy-outs in Western Europe with the exception of one Central and Eastern European fund. With our emerging markets investments we concentrate on Asia, but not exclusively. Within the region we do only pan-Asian rather that country-specific funds.
Our investments in venture funds are largely concentrated in the United States because we have not found many opportunities in Europe or in the emerging markets yet, although it should be noted we also have a Russia-only and South Africa-only fund.'
What does your due diligence process involve?
'We have a very extensive due diligence process, which takes a few months. We analyse the investments that the fund has made, do reference checks on the investment teams, and call other LPs and the managers of the portfolio companies. We also speak to the management of companies that have already been exited, other GPs (those that have bid against them or sold them a company, and those that have been in a consortium with them), investment bankers and lawyers. Our team also ensures we read all the quarterly reports.
Primarily we carry out our due diligence over the telephone but we also do visits and attend the GPs' annual meetings.
The due diligence process is much shorter with groups with which we have already been investing. These now form the majority of our investments and we do not do many new names any more.'
Do you invest with first-time funds?
'We have not had the best of experiences with first-time funds and that is why we are not so eager to do them. The only reason why we would consider a first-time fund is if we were keen to go into one particular sector and cannot find an experienced player in that sector.'
What are the most important qualities of a good GP?
'A good track record of both sourcing and exiting deals, a good track record of leading the deals and adding value to the portfolio companies, a stable team with minimum turnover, and an economic situation where the carry is shared widely amongst the team and not concentrated in one person. It is very important that GPs are not going to get paid if we do not.'
How do you assess whether a GP truly adds value to the portfolio companies?
'We call the management teams of the portfolio companies and ask them how often they speak to their GPs, how often they meet with them, what kind of added value they bring to the company, whether they replaced the management team or changed it, and how they handled the change in the management structure. In retrospect, we analyse whether the GPs have made good decisions at the right times.'
What have you learned in your 18 years of investment experience?
'Alignment of interest is critical, and so are wide sharing of economics and a stable team. In addition, I have often experienced that being in the right place at the right time is very important.
In today's world of oversubscribed funds it is necessary to build a relationship with the GPs so that they want to let you into their funds. You need to be responsive, proactive and flexible. Flexible means that when a GP has an amendment to the LP agreement and it is a reasonable amendment, do not just follow a hard line. GPs also like stable teams with stable commitments.'
What is your advice to new investors in the asset class?
'Do a lot of due diligence.'
What irritates you about private equity?
'The biggest challenge of this job is time management. You get so many PPMs, you have to meet so many people, and you have to have so many meetings before you can make a decision on anything. There are various layers of due diligence: you have to analyse the GP, you have to analyse the portfolio companies, you have to call the management of those portfolio companies, you have to speak with investment bankers, you have to do sector reviews, and you have to do strategic reviews. The level of work you have to do to reach an investment recommendation is so much more extensive than just responding to one opportunity. That is what makes this job interesting but it is also a constant time management challenge.'
What are the biggest trends for the private equity business?
'The huge amount of capital coming into the asset class means that not everyone is going to be able to deploy it. Another major trend is the consolidation within the industry. In the future we will see fewer groups and they will either be the large global funds or specialised boutique funds.'
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