Jocelyn Lewis

Hello, and welcome back to Private Markets 360, S&P Global podcast dedicated to enlightening and educating our listeners about the world of private markets from vast vantage points. Your Private Markets 360 cohosts both sit within Market Intelligence. I'll start off with introductions. I'm Jocelyn Lewis, Head of Private Debt Commercial Strategy.

Chris Sparenberg

And I'm Jocelyn's cohost, Chris Sparenberg, Head of Private Markets Commercial Strategy. I'm a super fan of our corner of the investment industry. We're thrilled to bring our listeners exciting guests every month for discussions about industry trends and other topics of interest here on the podcast.

Jocelyn Lewis

We share our press. And if you're interested in regular private markets content, hit subscribe and tune in. Ready to introduce our guest first?

Chris Sparenberg

Let's do it. Today, we're joined by Greg Turk, the former Director of Investments with Teachers Retirement Systems of Illinois, a $60 billion pension fund managing the defined benefit contributions from members, employers in the state of Illinois. For almost 20 years, Greg led the strategic investment decisions for the pension fund and developed a respected and award-winning investment team that evolved the portfolio into alternative and private structures.

During his tenure, the primary objective of Greg and his investment team was to protect member assets against large market downturns caused by economic unpredictability with a prudent investment strategy consisting of a diversified portfolio that seeks to participate in the upside of the market but is also positioned to better protect assets in times of high market volatility.

Greg is currently working at NG4, a multifamily investment platform as the Chief Investment Officer, whereby he's implementing and structuring a new asset allocation policy. Greg, thank you for joining us today, and welcome to Private Markets 360. How are you?

Greg Turk

I'm doing great. Thanks again for the invite. It's going to be great sharing my opinions on private markets in general. And again, looking forward to it.

Jocelyn Lewis

Awesome. Well, Greg, we'd like to start with the topic of asset allocation. So could you please provide an overview of how you think about asset allocation today and how your thinking has evolved over the past 20 or so years?

Greg Turk

So for the last 20 years or so, I basically led our high-level asset allocation at the total fund level, but then also I was very involved in the strategic direction of the private equity and other private verticals sectors also. So most, I think, institutional investors are really tilted into areas like private equity, right when I probably started my job 20 years ago.

And it took us a little bit of time to get an idea of what were some of the differences between private equity, public equity, some of the big cons associated with mainly illiquidity leverage, that kind of stuff. But we, as an institution, increased private equity pretty aggressively from about 3% to about 15% and got to that point maybe, I'm going to say, about 10 to 12 years ago.

In terms of asset allocation now versus then, I think most institutional investors have had a similar discussion which is what's been going on with private capital, it has been working. So a lot of those concerns with their liquidity and a lot of unknown and losing control of your capital for 5 to 7 years. Well, hopefully, talented GPs provided a heavy control premium to the capital. A lot of that has worked out. Most of the return expectations or premium expectations that we had going into this asset class going into private equity has really found a very solid footing.

Chris Sparenberg

What's the follow-on to that point you're making? I think it's interesting to talk about how the evolution of the relationship with larger managers has been over that time and whether you saw Illinois paring back allocations for new fundraisers from the larger existing managers or really what your strategy was for managing those relationships.

Greg Turk

That's been an area. I'm glad you brought that up. That's been an area that we probably leaned away from, more so. I think we, as an investor, there's a few areas that we've leaned more toward direct investing. I think a lot of LPs of size have tried to make direct investing a major portion of their structure.

With $60 billion, we have to be exposed more to buyouts versus venture to really move the needle. We're fortunate that we're not hugely large where we can still look for smaller and middle market buyout funds to potentially find [ supreme ] over larger ones, and I think we found that also in our investing.

And on the larger side, I think the reality as these fund sizes have gone from, let's say, $10 billion, $15 billion to $20 billion to $30 billion is I think there's a genuine feeling that the ability to continue to generate the same type of returns is going to be somewhat more challenging. And we've been seeing that coming through in the data.

Not all large funds. We probably have two, three, four really significant large fund exposures that we believe will continue to generate the same type of returns they've always generated. But others we've had to part ways with. And I think a lot of it is the larger the fund size is, the larger the deal size and a little bit of unknown whether a firm can generate a 2x net off of the larger-sized deals.

So it's made for some hard conversations with general partners, but I think it's also the reality of -- honestly, there's a lot of funds out there. There's always been a lot of funds out there, but now over the $10 billion fund size, I think there's just way too many for large institutional investors to really make choices. So the last probably 5 or 7 years, we've been trying to make some very difficult choices.

Jocelyn Lewis

The landscape is certainly evolving. We see even in our clients, large funds, middle market funds. On the private side, just doing bigger and bigger deals. And then just some really stay in their swim lanes, that middle market is ginormous. So lots and lots to do.

And one of our last episodes, we also chatted with -- I guess, past two episodes about operational expertise and really having trusted teams, a good culture that works together, really helps in driving some of those returns because there's no magic when you're trying to create those returns. There's a whole bunch of different levers, but I thought that, that was fascinating too, that the team really, really makes the difference.

Greg Turk

Teams are huge. And I think that's the other concern with scale, you can have 10 operating partners who are more focused on operations or you can have 100. I think the shops that have 10 and are maybe focused on companies where they can really have an impact, can affect that much more of a good outcome.

So we tend to lean a little bit more to those middle market and even the lower end of the middle market buyout funds where we can really get to know the operating resources that, that fund has and feel good that they can have an impact on those underlying portfolio companies because the new private equity model has everything to do with operational expertise.

Chris Sparenberg

And there's good quantitative backing for that, too. I'm thinking specifically about the Cambridge Associates white paper declaring a major that points out that smaller focused managers and especially niche-focused managers tend to outperform their larger generalist peers. And I think it has a lot to do with what you're describing about, the ability to concentrate a portfolio to have a small expert team and to not take on the risk of these bigger and bigger deals where the potential return could be lower.

Greg Turk

Well, we go a little step further. The beauty of now versus 20 years ago is I have so much more data at my fingertips. And there's a little over 400 basis point premium that we've seen from those middle market funds that have real good -- we call them deep moats.

They have proven that they can affect a lot of change at the investment company level and a 400 basis point premium over large buyout, large deals, that's extremely material and something that I think a lot of investors in my shoes will continue to try to lean into.

Jocelyn Lewis

Absolutely, especially if a premium like that continues, especially now, we've got a higher rate environment, too. So the cost of debt for financing has risen. So I think anywhere that you can find additional value, firms are really leaning in.

Greg Turk

Agreed.

Jocelyn Lewis

So keeping on the data subject, but maybe switching a little to underwriting. Can you talk a little bit about your process for underwriting investments and the role that data plays in the underwriting process?

Greg Turk

Absolutely. And this is a topic that I think has gone up exponentially in terms of how we were doing this 20 years ago. And data has a huge component to it. I think the second variable is there's so many ways that, as a big investor, I can access. Let's call it, data that's already been somewhat transformed and analyzed into something that now I can digest.

So most investors of our size use some type of a specialized consultants or have access to third-party data. And you can almost just push a button and get a full research report, built an investment and operational due diligence report from a dedicated consultant who, again, has been doing this for 30 years and knows how to put data together.

So it allows me to spend my time on what I think are the most important parts of the due diligence process. And as you can probably imagine, a lot of those are, let's call it, at the team level or the relationship level, really beginning to understand the key teammates on the other side of the table, but most importantly, the structure and how -- one of the biggest concerns that any investor in private equity has is you're going to get into an investment, which you think is going to be on your books for 5 to 10 years.

And 1.5 years later, some big event happens, half the team leaves or you have this type of disruption. So compared to 15, 20 years ago, my team and I spend more time getting to know the partners, really understanding what their core competencies are, either agreeing or disagreeing that, that next generation, that next level of investor is as good as that first level.

There's been a lot of first-generation to second-generation transfers of leadership. There's tons of data behind partner attribution, sector attribution and all that, that just makes our diligence that much easier. The other component is on the operational side. I think we've been talking about how incredibly important those resources are.

But if I don't have to spend all of my time putting a bunch of spreadsheets together on how the last two, three funds have gone, and I can rely on my consultant to do that, I could spend more time on the operational resources.

So we've been spending a lot more time getting to know that key person on the operational side to mainly make sure that, that person is going to stay in his or her chair for a long time because a lot of those people are somewhat new and making sure that those people are well centered, aligned with the deal partners, the deal team, I think it's critical. So those are just a few examples of some of the areas that we can go a little bit deeper now than we did maybe 10, 15 years ago.

Chris Sparenberg

And I think certainly, as you're seeing managers in this difficult exit environment spend so much more time and give so much more attention to the quality of their assets and to actually driving the value within them, improving the financials and improving their chance of exit, it just dials up the importance that much more.

Well, building off of your approach to diligence, I want to weave that in with the asset allocation philosophy and talk about the liquidity premium. So when you're thinking about returns from the allocator perspective, can you walk us through how you determine what return premium you expect for illiquid investments over liquid investments?

Greg Turk

You can ask someone that question and in 10 minutes later, you might not get anywhere or it might be a very thoughtful response. But honestly, that is the key to really, I think, feeling good about your allocation to most private structures. It's a little bit different with private debt. We're investors in private debt also.

You get a little bit more return along the way through coupons and stuff like that. But with asset classes like private equity, where you're going to be illiquid for a while, and the last 2 years are good examples that illiquidity persists a little bit longer. Most LPs are definitely wishing that the liquidity would come back the way it was in 2021. We're still nowhere close to that.

But I mentioned at the beginning of this interview that I've led the asset allocation at the total fund level. And I think that's where you got to go with your analysis on illiquidity. We do a heavy exercise annually to compare what our expectations are on public equity versus what our expectations are on private.

Every year, we read up plenty of investment consultants with plenty of Wall Street firms. There's plenty of third parties that will provide really good research on expectations for the next 7 years of public versus private. And it's more than just in liquidity. There's a lot of other ways to think about the private equity differences versus public equity.

But the reality of how you build it in is -- and the papers that I spend the most time gravitating toward are the ones that really think about or are very thoughtful with a lot of the aspects that we've been talking about, which is what can private equity do during the time that they're partnered with the company.

And it has everything to do with comparisons of growth, both top line, margins, profitability, buying entities, the buy-and-build models. But there continues to be, and we continue to really agree with a lot of the literature that discusses how much more effective private ownership can be versus public?

I think we've all seen how great public ownership could be within a sector like tech and especially within areas like software or semiconductors within tech, but for the broader public equity compared to private equity, that premium of what private ownership can add versus public is significant.

Jocelyn Lewis

I also think that there's just a lot more data that's readily available to compare and contrast those returns because even -- Greg, looking back, I don't know, 20 years, 15 years or so, there was still data out there, but not as much, and I worked more in the middle market previously, but still, there was always that question, how do you compare middle market and private equity to some of these big public equity companies.

They're not the same, but at the same time, there's some pretty stellar returns that can be generated. So what should your expectations be? And now there's all sorts of information that you can slice and dice in so many ways. So I think just having that information too and just being able to compare and contrast better, you can see some of these differences.

Greg Turk

Yes, exactly. And I think the other layer that we like about investing in private equity more specifically is most people in the public markets think about more beta exposure. We just want to be exposed to the market. And even if you're going to have a little bit more of an active overlay and say, okay, I want to be overweight to IT or I want to be overweight to North America.

Usually, when you drill down in those portfolios, they're not taking as much of that active beta as they think they are. In private capital, you can affect that type of an overweight type mentality in areas that you think have the ability to have some really good return drivers, that much more.

So an example within our portfolio is fintech. We, from time to time, do white paper analysis on certain themes. Obviously, everybody leans into AI, but there's a lot that's going on under the hood with AI. So we've had a real tough time just coming up with an AI play.

But fintech, you can take a pretty heavy private sector exposure to an area like fintech and then choose the best general partners that you think you can find within that sector. And the data is out there that really backs both taking that tilt, but then also you can find five to six pretty well embedded fintech GPs within venture and growth equity, whereas 10 years ago, that would have been like a 2.5 year exercise just to put all of that together. Now you can do it in 6 months to 9 months.

Jocelyn Lewis

And how about the retail sector, too, also wanting to get into private investments, having them offered even in 401(k) plans and things like that, where historically, unless you were ultra-high net worth individual, you would not have access to the private markets. So I think that premium speaks for itself where it's more diversification. It's another interested area that's going to be explored in a multiple of different ways.

Greg Turk

I agree.

Jocelyn Lewis

All right. Well, another topic I want to get your opinion on, I guess, during 2022, 2023, especially in the beginning half, we heard a lot about the denominator effect, which really pushed the LPs to sell private assets and rebalance their portfolios. But now public markets are open again.

We just talked about the tech stacks with high valuations. Do you think there is a numerator effect that's now a concern, and especially at an under-allocated pension fund, how does that balancing conversation go?

Greg Turk

We'd much rather have numerator problems than denominator problems. We'll always take those. Now the denominator effect, it's something that everyone that has sizable exposures to private assets needs to really have a plan ahead of time on how to deal with it. And as you said, if you have a negative cash flow or a substantial negative cash flow to begin with, it makes it even that much more important.

The way we've always handled it, and I think I mentioned that we've been fairly mature in private equity for 10, 15 years now, so our target has been 15%. So 15% of plan assets have been in private equity. If that number moves 1% or so one way or another, so you're 16%, 16.5%, we usually don't get too concerned because it's a lagging asset class. It takes a little bit of time for valuations to come in and stuff like that.

We'll get a little bit more concerned when it's 2%, 2%-plus overweight, especially. Underweight is fine. If it's 2% underweight, we just start writing bigger checks and look for more deals. When it's overweight 2%, 2.5%, we don't immediately act. We want to judge what's going on in the marketplace.

Oftentimes, what we'll do is we'll trigger a couple exercises or additional work. The first one is just trying to assess how much we think the private equity valuation at the next couple of quarters is either going to catch up with the market. So in 2021, 2022, in 2022, the public markets really started taking a drop, and we didn't necessarily see that or expect that with a lot of our private capital.

We didn't think a lot of the buyouts especially were going to get rewritten down as much as others were anticipating. So we did get concerned because private equity was 2% over, and we didn't expect those marks to really come down that much. So the other thing that we initiated was most LPs of our size are fairly active in secondary markets these days.

So we know some of our assets that can be more readily sold if general partners aren't selling quick enough or if we need to do some portfolio management. The secondary markets have been often open for us to sell $500 million or $1 billion of certain GPs. So we looked into that. We spent a lot of time looking into that also.

In the end, we didn't do anything. We felt that the market would come back. But anyway, that's what I think a lot of LPs do, you just force more dialogue. And our rule of thumb is at 2%. Other LPs might be a little bit different.

But luckily, we haven't had a significant environment where public markets have stayed down 3 years plus. But I think in that type of situation, we would have to substantially slow down the pace of private equity, but that's our rule of thumb.

Chris Sparenberg

That's great. Greg, we'd like to end with a conversation on your recent career transition. You're staying on the allocator side, but moving from a public pension to now being CIO of a multifamily office. Curious to hear your thoughts on your goals at NG4 and also some of your early observations on the difference between what you did for the state of Illinois and now what you're doing for multifamily office.

Greg Turk

One of the most satisfying parts of my career were the close to 20 years that I spent at a big public plan, representing school teachers. All of our constituency were school teachers in the state of Illinois. And as I mentioned, generating a nice premium on private equity felt really good for what we were trying to do for the overall risk return of that fund.

So what I'm doing now is not too dissimilar to a much smaller model. So much smaller, comes with both pros and cons. A lot of the reasons why I think my background was of interest to this family. It has to do with what we were able to do as a team within private equity. But with anything in the investment world, you learn so much more through your mistakes than the wins.

And with private equity, very few people come out as a private equity investor and get everything right the first time. So I think a lot of the conversation with the family office have been on that same wavelength. What have you learned over the last 19 years and how does that make you a better investor. Most family offices, they're very unconstrained and there are no two that are alike.

But most of them have really embraced private equity. Some even as much as 50%, 70% of the asset allocation are private equity. So this is a family, I think, that has already invested very wisely within private equity. And honestly, have done a very good job within the venture capital space specifically.

And I'm excited to learn a lot of what I've learned more at, let's call it, the buyout and direct investing component to my background and mirroring those up with a very successful team of venture capitalists. I think, it's going to be really exciting on the private equity side.

And I think everybody, whether you're a small investor or a large investor, is really trying to fine-tune what they're looking for within private capital because I think everybody is continuing to lean into these type of exposures, but it's probably the area that continues to be the most competitive at getting the allocation, getting the relationship with the GPs that you really want to get. So, so far, it's been a lot of fun, and we'll see how it goes.

Chris Sparenberg

That's great.

Jocelyn Lewis

What an exciting transition to working with a different group, venture capital, success previously. Your private equity success sounds like a good mixture.

Greg Turk

Well, so far, it's been speaking with a few too many lawyers and trying to get a lot of fun, the org stuff put together, but that's a lot of the same type of fun I had at Illinois teachers when I first got there. There's so much infrastructure and stuff like that, that you need to put in place before you really get going.

Jocelyn Lewis

Certainly, all very important, though.

Greg Turk

Yes.

Jocelyn Lewis

Well, thank you, Greg. We really enjoy today's discussion about investment decisions that we've been faced with from your unique point of view on the LP public pension side. It was really illuminating to learn your considerations for asset allocation, your process for underwriting and how you're navigating the market volatility. We wish you the best in your new role and really appreciate you sharing your knowledge with us and our listeners.

Greg Turk

Thanks so much. I really enjoyed it.

Chris Sparenberg

Thank you again to our wonderful guest for a great chat today. I really appreciate everyone listening in. If you're looking for more private markets content, hit subscribe to catch future episodes and listen to our earlier episodes wherever you listen to podcasts. Cheers everyone.

Jocelyn Lewis

Thank you so much. You can also subscribe to our monthly Private Markets 360 newsletter. The link is in each episode bio or connect with us on LinkedIn. Have a great day.