Pension Plan Commitments Come Home: Understanding In-State Investment Programs

by Andrés Ramos, Content Marketing Specialist – Nasdaq Private Fund Solutions

No place like home

As US-based pension plans strive to put capital to work in the private markets, one area has increasingly come into focus as a destination for new commitments: their home states.

Historically, an overwhelming percentage of capital invested in private funds has flowed to companies located in a short list of states: places like California, Massachusetts, New York, Florida, and Texas.

In an effort to change this dynamic and stimulate their local economies, state pension plans are increasingly issuing RFPs for in-state investment programs. According to a recent presentation from Callan on the topic, at least 18 different states have launched in-state or regionally focused investment programs.

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This article reviews some of the specifics of in-state investment programs and gives private fund capital raising professionals three key insights for building successful proposals for the programs.

In-state investment programs, in short

In-state investment programs, often structured as large fund-of-one vehicles, require that fund managers make investments in companies based in a pension plan’s home state, or in companies whose operations are substantially benefit the home state in some way, generally through local employment.

Some programs are more flexible however, incorporating a mix of commitments to fund managers and direct investments. The In-State Private Equity Program for New Mexico SIC is one such program, with stated long-term composition goal of “60-70% fund managers with regional/NM focus and 30-40% NM-specific investments.” Direct investments often take the form of real estate or co-investment opportunities.

The eVestment platform’s Market Lens tool features various in-state program documents collected from public pension plans, each with valuable insights for managers who wish to pursue such programs. After reviewing these documents, which include thorough investment recommendations from consultants, we’ve identified three key insights for managers targeting in-state investment programs:

#1 – Understand the local economy

It is critical that fund managers spend time understanding the opportunity set of a pension plan’s home state. Simply applying an existing private markets strategy to a small state or regional economy is not an acceptable approach for in-state investment programs.

One of the most common reasons pension plans listed for declining a fund manager’s proposal was a failure to adequately understand the local economy and speak to the opportunities that can be found there. As North Dakota SIB noted in their due diligence review of one fund manager, “Proposal did not meaningfully reference North Dakota opportunity set or potential local partners and lacked specificity on how to implement the mandate.”

A key to any successful pitch from a fund manager for an in-state investment program is understanding specifically where opportunities are in the pension plan’s home state and speaking to them directly regardless of how compelling they may or may not be. Pension plans are acutely aware of the challenges associated with investing in their local economies and are prepared to assume those risks to performance.

Demonstrating this local economy knowledge and acknowledging of the non-investment return benefits that can result from the investment program, like job growth or innovation, will resonate with pension plans during the due diligence and manager selection process.

#2 – Speak to deal flow & sourcing

Very much tied to the first insight, deal flow & sourcing is one of the most important areas of inquiry during the diligence process for an in-state investment program. In the previously mentioned presentation by Callan, “lack of support from sponsors” was cited as a reason some programs under-performed. This suggests that after winning an in-state investment program, some managers failed to find opportunities to invest.

Alaska Permanent noted this challenge in a recent update on their in-state investment program, “[The] lack of established private equity firms focused on Alaska, perceived lack of diversified opportunity set by non-Alaskans likely increased the complexity of the procurement vis-à-vis a similar processes conducted by more populous states elsewhere.

Before committing to a fund manager, pension plans must be certain that the manager will be able to source local deals to sustain the size of the fund. Fund managers must speak to their specific plan for sourcing deals within the home state or region to mitigate any concerns from a pension plan about deal flow and ensure that capital will be deployed appropriately.

#3 – Commit to a local presence and a dedicated team

In documents sourced from the eVestment Market Lens tool, the most notable positive response from pension plans to fund manager proposals for in-state investment programs was when the manager signaled a commitment to having a local presence in the home state.

Managers who made commitments to open local offices or allocate dedicated manpower to the prospective in-state program were viewed much more favorably by pension plans and their consultants in proposal reviews sourced from Market Lens.

In their proposal to North Dakota SIB, fund manager 50 South Capital Advisors even proposed creating a $10 million start-up incubator as part of their in-state program, a concept that the pension plan viewed favorably.

Conversely, when a pension plan felt that their in-state investment program would not be the central focus of the team tasked with managing the strategy, that proposal was viewed less favorably. In a review of another fund manager proposal, North Dakota SIB noted, “[We have] Concerns about whether NDSIB will get adequate attention from the senior team.”

It’s critical that fund managers spend time discussing the allocation of team resources in their proposals for in-state investment programs and ensure that it meets the expectations of the pension plan.

In-State Insights

These insights on in-state investment programs were sourced from Market Lens, a searchable database of intelligence, documents, and mandates from more than 8,000 public and corporate pension plans.

Click the link below to learn about how the tool gives users an “unfair” advantage over their competitors.

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