Those with dry powder are finally in their heyday, and Maurice
Gordon, who heads the private equity group at the New York-based Guardian Life
Insurance company with $75 billion under management, is observing values
declining and the market readjusting, which, he says, is rapidly creating one
of the best times in history to invest in companies.
During this interview with Markets Group’s Head of Production and
Investor Relations, Andres Ortiz, Gordon details his careful approach toward
many of the factors that are affecting today’s portfolios and explains how
Black Swan and current economic events are creating opportunities and influencing
his investments. With a passion toward making solid investments for life
insurance beneficiaries, he discusses the denominator effect, interest rates,
and establishing relationships with sought-after private equity funds among
other investment topics around fund
investing, co-investing and secondaries.
Gordon has more than 20 years of
experience in private equity investing and portfolio management and has
successfully originated and lead 29 direct and co-investment transactions,
managed institutional private equity portfolios totaling over $4.5 billion in a
variety of buyout, venture capital, mezzanine and special situation
partnerships, hedge funds and private placements. He has served on 23 company
boards of directors and fund advisory boards.
Previously, Gordon held roles as
managing director of The Hartford Insurance Company’s private equity investment
group, and as managing general partner for the CIGNA Investment Corporations
mezzanine limited partnerships. He earned his B.A. and M.S. degrees in
Economics from the University of Illinois, and is a Chartered Financial
Analyst.
Andres Ortiz (Markets Group)
Can you tell us about your role at Guardian Life and your career progression?
Maurice Gordon:
I head up the private equity group at The Guardian Life
Insurance Company of America, which is a New York-based company located in
Hudson Yards. Guardian is the 4th largest mutual insurance company in the
country and has been serving customers for 160+ years. We pride ourselves for
our financial stability, and we have the ratings to prove it – such as our AA+
rating and most recently, our Moody’s rating upgrade to Aa1. From a product
standpoint, we sell individual Whole Life insurance and Disability Insurance,
and we have a competitive portfolio of employee benefits, including dental and
supplemental health.
We have $75 billion of investable assets, and my team and I
get about $6 billion of that to invest and manage for the company.
So private equity is an important part of the portfolio.
As for myself, I have 25+ years of investing experience.
This is the third successful private equity team that I’ve led. I started out
at Cigna up near Hartford, Connecticut, heading up their private equity team
and then moved to Hartford Insurance and headed up their team for a few years. Then
I did some direct investing in Chicago for a while with the co-Investment fund
and had an opportunity 12 years ago to move to Guardian life in New York and
ultimately lead the team there.
So, a lot of institutional experience, mostly on the insurance side.
Andres Ortiz:
Could you give us a little bit more color on the alternative investments
that you have in your portfolio?
MG:
Think of our portfolio as a well-diversified institutional portfolio, and what
I mean is: we have all three legs of the stool, as they like to say. So, we do
the primary fund investments, but we also do direct investing, or some people
call it Co-investing, and then third of all, we do secondaries to help balance
the portfolio. On the primary side, we do buyouts and growth and venture, and
we’re a little bit unique in that we do a little bit more venture than a lot of
our peers do in the insurance industry. So the portfolio is targeting about 20%
venture capital, [whereas] a lot of other insurance companies are around 5%.
And it has done very, very well for us. We’re able to get
into some really exclusive venture groups that even though we have all this
turmoil going on today, it’s been a very successful part of the portfolio.
Geographically, we’re roughly 80% in the United States, 10%
in Europe and 10% rest of world. About half of that in Asia, and a little bit
of that, about 3%, in China. So global diversification as well as
diversification by type. By industry,
we’re diversified, similarly to what you would see in the S&P: we’ve got over 3,500 individual companies now
in the portfolio.
But we maybe have a little bit more tilt toward finance and
industrial. Other than that, it’s a very well diversified portfolio.
One of the things that a lot of people are focusing now on
is private equity. It gives people access to markets that they don’t have
access to. As you know, over the years, the public markets have been getting
smaller and smaller regarding the number of companies that are available. Private
equity opens up a whole new world of investable assets that institutions have
access to and high net worth people are trying to get into that segment now
also. But we think it’s important to be able, from an institutional standpoint,
to invest in that whole private sector that is very unique and very important
to institutions.
So, we’ve got about 60 core relationships and we’ve got 200
different funds. The relationships with the sponsors are very, very important.
Then it’s about the people and it’s about making sure that you build those
relationships in a thoughtful and long-term way.
AO:
Have you changed your approach in the last 12 months after seeing the hike
in interest rates and consumer price index going up?
MG:
A couple of things. First, there’s the denominator effect: which makes it look
like you’re over-allocated to private equity because other areas are going down
and private equity has done well. Insurance companies or my team want to have
about 3.25% to 3.5% in private equity. And if that number goes up from a
percentage standpoint relative to everything else, long term, we still want to
make sure that we have that percentage and most insurance companies operate
that way.
But we don’t want to jump in and out of the market. The term is “vintage
year diversification.” So it’s really important to consistently invest from
year to year to year. I was at a meeting recently and there are a lot of
limited partners who are getting out of the market because the denominator
effect is making it seem they’re overallocated. So they’re just saying, “Look,
you get no money in 2023.” They just completely get out of the market.
We think that’s a really bad idea. You want to be
consistently investing because of good opportunities that will come up in a
down market. Our Board of Directorsis somewhat unique in that they allow us to
look five years into the future. So, we say, “What do we invest today so that
five years from now we’re hitting our target allocation?” And we use different
models to do that. We use Cobalt, which is a Hamilton Lane product using 40
years of data, customize it to our portfolio, and then make projections from
that. We use that new technology to get us to where we want go in five years.
Why am I saying all this? Because that means I’m not jumping
in and out of the market, where if I might normally invest $500 million a year,
maybe that only goes to $450, right? So I’m still investing consistently across
the vintage years. I haven’t really heard of people who are allowed to look
five years ahead talking with other limited partners. The more typical thing is
they end up jumping in and out which is a bad idea.
Regarding what the interest rates are doing, and how they’re
impacting the portfolio, I think the valuations overall are coming down because
basically, how you value a company is a series of cash flows going looking
forward, a series of profits for the next 15 years, and then you apply a
discount rate to that. Well, that discount rate is tied to interest rates. So
the higher you discount that cash flow, the lower your valuations are. I think
that overall the portfolio valuations, especially on the growth side are coming
down. So that’s impacting My Portfolio because of the of the fact that we’re
adjusting to the new values. Some people say that it might take four or five
quarters of private valuations – that they don’t change in one quarter. It
takes a while for the market to figure out and discover what the true value is.
So that’s actually going on now. There are a lot of people focused on
valuations.
With the higher interest rates, the sponsors are looking at
those future cash flows and looking at the expert costs and how that impacts
profits, and they are figuring out what they’re going pay, and what they’re
going to pay for companies. So, company valuations are now starting to come down
and that’s why you don’t want to be out of the market during vintage years like
this.
This, historically, turns out to be the best time in the
world to invest in companies, because now the values are coming down and the
market is readjusting. And so, if you have dry powder and we have a lot, this
is a great time to be investing. And interest rates going up are bringing
values down. So, overall, this just makes it a great time to invest.
AO: In private equity or private markets are you using
any sort of ESG guideline or is that something that your program doesn’t really
include right now?
MG:
We do consider ESG and our approach is very much aligned to
Guardian’s culture and priorities. We hired our first ever Head of Investments
ESG and Integration last year. We consider ESG factors as part of our mandate to deliver
strong returns and of course, the social for us is where we have a history
making the greatest impact from our philanthropy to creating a just, diverse
and equitable workplace.
I used to be on the ILPA (the Institutional Limited Partners
Association,) Board of Directors and we’re still very involved with them. The
association is the voice for over $2 trillion of limited partner investors
across the globe. They’re like the number one organization for limited partners
in private equity. And they are very big in ESG. They’ve done a lot of good
work there, such as research and white papers on ESG. So, we will look at them
and say, OK, what are the best practices today? How should we think about ESG?
What questions should we ask? What are the six factors that we ought to be
focusing on? And then we want to incorporate industry best practices into our
program. Now this is changing every year, right? Best practices are still early.
They’re still being developed.
Every consultant now has their set of factors and trying to
figure out what we should measure. But we can go to ILPA and they’ve spent time
on this and they say: these are the six things that we should measure.
And once we know what we should measure, then you can make
progress. So, they’re trying to bring the industry together and focus the
industry on how to move ahead on ESG issues.
The other thing we’re doing is, we have a questionnaire that
whenever we invest in a fund, they have what we call a due diligence
questionnaire. And in that we’ve incorporated the UN PRI questions that are
being asked to focus on ESG. So the Principles of Responsible Investing is sort
of the leader in the world, on tracking ESG, and helping institutions become
accountable and make progress in ESG. The ILPA then incorporates those
questions into the questionnaire that we ask of all of our sponsors, so that we
can see that we are making progress along those lines.
We’re trying to do that and for Guardian’s program, we’re
making sure that we’re following best practices, being innovative, asking the
right questions, talking to our sponsors and trying to make progress along
these lines. But Andres, that’s an important, very important issue right now.
AO: For our readers who are who are not only LPs but also
GPs: How do you go about doing manager research and manager selection? What
process do you use?
MG:
There are so many different places you can get information
now. We try to incorporate as many of those as we can. We use Pitch Book,
Burgess, we use Cambridge. There are a lot of good organizations to help us
zero in on who are the best sponsors and how to find them. A lot of the work is
us getting on the phone. We’ll target who we think the best growth managers are
through their sources
But then, most of those funds are oversubscribed, so you have to develop
relationships. You say I want to be in this fund, this fund and this fund, then
start making calls. Maybe you get a small allocation on the fund, but you have
developed a relationship so that in the next fund, three or four years from
now, maybe you get a bigger allocation. So it takes just a lot of years.
After you find the best funds, how do you get into them?
That’s maybe the tougher question. It’s not how do you find them, it’s how do
you get into them.
And then we have a whole process around how we try to do that and develop
long-term relationships.
There are a lot of different metrics, and we have a decision matrix that we use
that’s proprietary to Guardian. So, we’ll look at about 25 factors: whether
it’s a buyout, or growth, or venture, or a Co-invest (they’re all a little bit
different). But we, as a team, say, “What do we think are the most important
things to look at?” And we will give those the scoring and a rating and then
you add it up.
It’s the idea that you are thoughtful and think about, “What
are the important factors?” and then you
institutionalize that by having a matrix and a format. If I lose a couple of
people or they go on to better opportunities, we’ve institutionalized that
thinking into what we call a matrix. But really, it’s “How do you make
decisions?” And we are continually improving that.
Another point regarding the decision process is you need to
have a very institutional approach to how you invest and how you find the right
managers.
When I was meeting with emerging managers, they were
gathering investors for Fund 1, and not in any databases. So, you meet them at
events, you talk to them, you get their ideas on how they’re doing things, you
develop relationships. Maybe we don’t get into Fund 1, maybe we wait until Fund
2, but at least they know us, which will help give us access down the road. So
private equity is very much a long-term game. It’s not like the public markets
where I’m going buy and sell three times a day and get in and out of stocks.
It’s really a long-term approach and that’s how we do it.
AO:
What keeps you up at night up at night? What do you see as a challenge in
the next 12 months or so?
MG:
All of these things going on with the banks. Right now, this
could have been really a huge regional bank run that could have really put
stress on the system and hurt all of our companies.
So does it keep me up at night? Not necessarily because I didn’t know about it
until two days before it happened, right? I mean, how can an A-rated bank go to
zero and be in default in two or three days? I mean, this is just unheard of.
So maybe it’s the Black Swan events that you always think
about and you always worry about. I think it’s good to worry. It’s good to, you
know, not get complacent. You should always be worrying about money, and making
sure that it’s invested correctly and should be asking yourself, what areas do
you want to be in?
And globally? Where should I be? How does China play into
all of this? There are so many geopolitical factors coming into play. You need
to think about that. You need to have a thoughtful approach so that when I go
to my board of directors and they ask me if and what we thought about, we have
answers on our approach. Yes, we do
worry, but we are proactive.
If I’ve got a diversified portfolio, at least I can fall
asleep knowing that no matter what happens, it’s probably only going to have an
impact on a small sector of my portfolio. So overall, if I’ve looked at the big
picture, nothing’s going to collapse my entire portfolio, because I’m well diversified.
So at least I can fall asleep after a while.
But I still worry.
Everybody should worry because money is important, right?
AO:
Absolutely. And then the last question (just to end on a positive note,) what
gives you hope for not only your portfolio but the industry, or private equity,
generally speaking?
MG:
What gives me hope is that this is probably the most
exciting job you could have. Every morning you wake up, there’s something new.
There’s a new company, a new idea, a new approach, especially in venture
capital. I mean, who would have thought ChatGPT would change the world? Who
would have thought crypto would become de-emphasized so quickly!
Who would have thought you’d have to completely rethink how
you do Treasury in your companies? With all the new companies that are out
there, think positive, we’re going to create jobs, we’re going to help people.
We’re going to help the world. We’re going to try to fix climate change. And
every day it’s something new and exciting that can have a positive impact.
Since we are a mutual company, every dollar we make goes to
the policy holders and this wouldn’t be the case if we were a public company.
But by being a mutual, we are very aware that every investment decision we make
has a direct impact on the widows, children and people that need life insurance
in their time of need. And to know that Guardian’s going to be there to write a
check and be there for its customers is rewarding. So, I feel good knowing I am
with a purpose-driven company, that if we make good investment decisions, it
will help make a difference in people’s lives. So that’s a positive way I think
of the world. It’s a plus.
(Note: the following is a disclaimer Markets Group agreed to provide, from Guardian) This interview includes the views of
Maurice Gordon based on his own background, research and/or experience. Opinions,
estimates, forecasts and statements of financial market trends are based on
current market conditions and are subject to change without notice. References
to specific securities, asset classes and financial markets are for illustrative
purposes only and do not constitute a solicitation, offer, or recommendation to
purchase or sell a security. Past performance is not a guarantee of future
results. Material discussed is meant for general informational purposes only.
Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or
accounting advice.