By Chris Glynn and Christine Giordano
Following a strong career as both allocator and manager, and an MBA in Finance from Columbia University, Kirk Sims joined the $180 billion Teacher Retirement System of Texas (Texas TRS) in 2019 to direct its emerging manager program. The program has $5.9 billion committed and boasts a 5-year annualized return of 11.1%. At its recent Emerging Manager Conference, it hosted about 3,072 potential managers and allocators. Institutional Allocator by Markets Group talked with Sims about his methodology for 2022.
Markets
Group: How does
the Texas Teacher Retirement System (Texas TRS) evaluate emerging managers to
ensure that a certain fund manager has what is needed? Is there a process to
groom, or train, or mentor, an emerging manager that is unique to Texas TRS?
Kirk Sims: Each
manager is evaluated by an objective measurement system that we have in place for
each, per a specific asset class. For a private equity, private real estate,
infrastructure, long-only or hedge fund manager, we have certain criteria. The
criteria will allow Texas TRS to identify each fund manager in the respective
fund universe who is outperforming – or underperforming.
Again, each criteria is unique per asset class, which has a unique circumstance that is
affecting performance. We cannot expect a long-only traditional equity manager
to have the same impact that a private equity manager would have based on
performance. Also, each criteria will allow us to be very objective – as we
look at the manager and performance – which I think is important.
As
far as grooming, training or mentoring, sure, and that is an ongoing process. In
a situation when I first talk to a manager, the conversation can be about the fund
pitchbook, as in, “We need more detail in the pitchbook,” or “We really do not
need as much detail,” or, “I understand what is being shared, but can we
condense the performance data?”
The
grooming can start early – even before the emerging manager program portfolio.
But then, once a fund manager is listed in the portfolio, we share what we
expect as each manager is maturing. For example, a fund manager with $250
million will have the expectation of XYZ versus a $750 million fund manager,
who is further along in its emerging manager lifecycle. We actively stay
engaged with each manager.
Once
a fund manager is in our emerging manger program, we do everything to help.
MG: You have been leading the Texas TRS
emerging manager program for a while — can you speak to some of the successes?
KS:
We have seven graduates
from our emerging manager program who are currently managing $3.4 billion for Texas
TRS. Each past manager – could be private equity or could be private real
estate – is part of the main trust itself. I consider them to be successful but
naming each manager would not be fair.
MG: How many managers came up through the Texas
TRS emerging manager program?
KS: We have backed 200 fund managers as
well as 300 investment strategies in the 17-year life of our emerging manager program.
MG: Can you offer advice for people considering
starting an emerging manager program similar to Texas TRS?
KS:
In talking to my
industry peer group, the first thing that I bring up is to have a buy-in—a
buy-in from the staff as well as a buy-in from the executive arm of the
organization. A buy-in would almost guarantee a successful emerging manager program
because everybody is engaged at each level of the organization to make the
program work. The structure in place will not matter, when the staff is
involved – as well as excited about the opportunity – it should be successful.
MG: What are some other ways emerging
managers benefit from being part of your program?
KS:
We have helped to be a
reference, as well. If a manager is in a final presentation or is being
considered for an allocation, I am more than happy to talk to that potential
investor and to share our experience. That is important.
MG:
Your career
prior to TRS had quite a bit of experience in finance. Have you been an
emerging manager?
KS: No, not as an emerging manager, but I
do have experience in asset management. After I graduated from Columbia
University, I went to work for a boutique asset management firm named Brinson
Partners, which I now consider great career experience. I met one of the smartest
people in finance – Gary Brinson – who is in academic textbooks because of his
Brinson attribution. (Editor: Brinson popularized performance attribution
based on active weighting; Brinson retired in 2000.) That was the same Gary
Brinson.
Leaving
Brinson Partners, I went to a much smaller firm, Thomas White International,
where I worked in the operation area and learned the operational side of
investment management. Between the investment arm of the business, as well as
its operational side, I have familiarity with the overall picture because I
literally used to do it.
MG: What are the set of criteria for Texas TRS
to define an emerging manager?
KS: Our criteria for the emerging manager
program is a firm with $3 billion or less and a fund with $1 billion or less. We
invest in Funds I-IV.
MG: Can Texas TRS provide the seed capital?
KS: Because we work with each fund – first
through fourth fund – there are different entry point in that spectrum. We can
hit any of those entry points.
For
fund one, we can bring the first capital in. Or we can be what I call “foundational
capital,” which is the capital given to a fund after the seed capital. The seed
capital is what is putting the firm in business. We are still extremely early
into fund one. We can also have already done a fund one as well as fund two. We
can be extremely early, or we can be in after a fund one or fund two is already
on the ground.
MG: What
about investing in infrastructure?
KS: We are
engaged with infrastructure for the emerging manager platform, of course. But
for Texas TRS, infrastructure can also be things other than energy – including
fiber for home network, as well as fiber optic for 5G. It can be shifting.
We
are also looking at digital asset infrastructure. Not looking to invest in
currencies, per se. We look to invest in the underlying technology that is in
turn driving the universe of digital asset. Texas TRS is not looking at the
currency, which is not our purpose. The infrastructure is used to create
whatever the entity is – purely blockchain, an algorithm running off it, or a
clearing hose. But what is important for us is the technology underneath – the digital
infrastructure.
MG: Can we talk about the emerging manager team
and fund pipeline, not to mention Rock Creek Group and Grosvenor Capital?
KS: We have a three people emerging manager
program based in Austin, Texas. Rock Creek Group is our partner for our public
market, while Grosvenor Capital is our partner for the private market. Both are
a separate account managed for Texas TRS and I consider each an extension of
our internal staff. They allow us to get a better view into the fund universe –
and perform the investment due diligence and the operational due diligence for
our emerging manager investment.
We
have been blessed with an extremely strong pipeline. In fact, a great pipeline.
MG: How will Texas TRS develop its emerging
manager program pipeline?
KS: I view our pipeline as the skilled
professional spinning out of a larger organization. A skilled professional can
be a particular individual, or could be a skilled team, but I define them as a
strong pipeline candidate. You are seeing a number of people coming out of
organizations who give us the opportunity to put capital to work.
The
other thing I see in the pipeline is the number of diverse funds that are being
launched, which are increasing. I think that for Texas TRS, as long as the
larger organizations keep providing that opportunity for this talent to rise
and get the skill sets, we should continue to see the opportunities with
spinouts, both individuals or entire teams.
MG: This past year seems to have increased
diversity. What are you seeing that on your end?
KS: The largest increase that I see is
women-owned fund managers. That is across the spectrum, both private and public
hedge fund management.
MG: What do you think the best practice is
for meeting and evaluating a new emerging manager?
KS:
The best
practices for building a relationship with an investment manager – especially a
new manager – is you should meet that manager in-person. Then, ideally, be able
to go visit the managers offices, sit down with the managers and talk with
other people at the organization, get to know them other than just the
portfolio managers or investor relations.
The
pandemic interrupted that opportunity, then forced us to meet people via Zoom
Media. The pandemic also gave us a fairly unique opportunity to meet more
people – believe it or not – at the same time. Nobody was on the road during
the pandemic. That was one of the better outcomes of being forced into that
Zoom environment.