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Institutional Investor Profile: Michael Taylor, Director of Resources, Surrey County Council08/03/2006. Source: AltAssets. 
Michael Taylor on Surrey County Council's global investment approach, his targets and on why he has chosen to move away from direct investments.  Taylor has been investing in private equity for Surrey County Council pension fund since 1986. From 1986 to 1998 his team made direct investments only. In 1998 they included investments in limited partnerships in their portfolio, while also continuing to invest directly. The main reasons for moving away from direct investments were that they had proved to be too time-consuming and offered too little risk diversification. Taylor was convinced that he could get a better spread of risk through fund investments. That is why from 2001 onwards Surrey County Council has been investing in limited partnerships only, and has broadened its portfolio from a solely UK to a global portfolio.
Taylor's strategy is to have a mixture of funds and funds of funds in his portfolio because through the funds of funds operations he gets a good exposure to a wide range of funds without having the administration hassle that would come with it if he had to look after many separate fund investments. The average investment size per fund or fund of funds ranges from £3-8m.
Surrey County Council is a large organisation with an annual turnover in access of £1bn. It has property assets of about £1bn and a pension fund, which is currently market valued at £1.25bn and has liabilities of £1.75bn.
Taylor, a qualified accountant, has been with Surrey County Council for 25 years. His responsibilities comprise all of the Council's finances, including the pension fund. His team comprises seven people: four county council trustees, two other employers' trustees, and a member of staff. Taylor also has an independent advisor and a specialist advisor.
What is your investment strategy?
'The investment strategy of the Surrey County Council pension fund has been fairly consistent over the past four years. Our target allocation to private equity is between three and five per cent. Our current commitment is over £50m, which represents over four per cent of the fund, and our current investment is around £23m, which represents two per cent of the fund. The target future commitment is £65m.
Our strategy is to diversify by manager, investment stage, sector, vintage and by geographies. I want to be sure that the managers I am investing with have good access, and I want a global approach.
My policy is to have core investments in UK private equity, which we have done through ISIS Capital, formerly known as Friends Ivory & Sime Private Equity. To supplement that we have investments in another UK series of funds, the HgCapital funds - with a little bit of capital in European investments in there, and global funds of funds through Goldman Sachs and Merrill Lynch, and European funds of funds through Standard Life. Having chosen those as my strategic holdings in private equity in the UK and globally, I am consolidating my investments in those funds to get a good spread of vintage. I am not particularly looking for many more managers. I have confidence in the managers I have chosen and regularly talk to them about their next funds. Although I plan to maintain my exposure and my diversification I review my plan annually.
We are governed by the local pension fund regulations and there are limits on the sizes of the funds but they are not relevant to our private equity investments. For the sizes of investments that we have got there are no constraints at all.'
What does your due diligence involve?
'I do a lot of research by following the press, attending conferences and talking to people in the industry. My specialist consultant does not only give me advice but he also carries the technical due diligence on the funds in which we want to invest.'
How is your portfolio structured?
'Current fund or fund of funds investments consist of ? per cent in start-up and early stage, ? per cent in development and ? per cent in mid-sized buy-out, and ? per cent in large buy-out. This to me is the best fit for the types of returns that I am looking for. I do not want high risk, I want private equity portfolio diversification and better returns than I would expect from quoted companies. My target investment performance is to beat the FTSE all share by two per cent per annum.
There are no secondaries in the portfolio, and we have never done them to date but I have been thinking about adding them to our portfolio. I also have no specialist funds in my portfolio. Overall our allocation to private equity is not that big, and I want a general exposure to private equity rather than being specific in that nature.'
Do you invest with any local or UK regional funds?
'No.'
Have you ever invested in first-time funds?
'Not really, although you could say that ISIS Capital is to some extent a first-time fund but the team had worked together before they founded ISIS. I have had experience with that team for nearly ten years. It is unlikely that we do first-time funds in the future but I am not averse to first-time funds. It all depends on the people who are running them.'
How many investments do you expect to make over the next 12 months?
'Probably one or two - that is the average. My annual allocation depends on when funds are raised.'
What are the main qualities of a good fund or fund of funds manager?
'They have got to have access to investments and good-quality research, a good track record, and people who can explain what their strategies and their policies are. At the end of the day it is a mixture of factual data (performance and achievements in the past) and our judgement on that company, style and strategy.'
What are the main trends in private equity from where you are sitting?
'A lot of money went into private equity about three or four years ago following the Myners Report, which recommended that pension fund trustees pay more attention to private equity. The industry always goes through such cycles, and we are now seeing another large amount of capital coming into private equity.
The main issue for me is to ensure that the funds I am invested with are investing. Obviously I want them to be investing sensibly, and you have to have confidence that their strategy is not changing just because the market circumstances are changing against them some way.
I think it was tough a year or so ago but things seem to be easing at the moment. There are a lot of funds around and a lot of money is being generated and there seems to be a fair amount of confidence still that returns can continue to beat the quoted sector.
I would expect that in the future there will be pressure on management fees as more and more players are coming into the market. Currently fees are high and I expect them to go down.'
What piece of advice would you give to an investor new to the asset class?
'Talk to your consultants and assess what risk you are prepared to take, then look at the most cost-effective way to generate good returns within that risk profile.
Investors in private equity and venture capital need to be patient. It is unlikely that you know much about how your fund is performing for some time. The J-curve on this tends to be over three or four years. In my experience on direct investments is that one third goes really well, one third probably goes very badly and one third does OK. You should not be surprised by companies folding because hopefully it will be balanced by companies that are very successful. From an institutional point of view, I am more interested in the internal rates of return than multiples of capital gains. I am not really keen on multiples of capital if it takes ten years to achieve them. I am more interested in high internal rates of return, which can then be reinvested.
It is very difficult to choose which funds to go into. There is a constant marketing and selling operation. I tend to make my decisions on what I am going to do over the year within a relatively short period of time. Once I have reviewed my strategy, I do not take any further calls from funds or funds of funds for the rest of the year and implement my strategy.'
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