Alternatives, Asset Allocation, Asset Managers, Emerging Managers, Institutional Investors, Pension Funds, Public Funds

Texas ERS, PAAMCO Begin Building Applicant Pipeline for HF Seeding Platform

An innovative joint-venture, emerging hedge fund seeding and support platform launched by the approximately $28.5 billion Employees Retirement System of Texas (ERS) and Pacific Alternative Asset Management Company (PAAMCO) during the summer, has whittled a field of hundreds of emerging firms vying to participate in the platform down to an initial “pipeline” of 35 firms, according to Sharmila Kassam, deputy chief investment officer at ERS. She said the platform, called PAAMCO Launchpad, continues to look for more managers that are seeking a partner to help build their hedge funds, and that the pension fund expects to host like-minded allocators in Austin, in February, to discuss plans to create an “eco-system” that fosters the development of more emerging managers.

It has taken us two years to formulate PAAMCO Launchpad; It’s taken that long because when you do something innovative you have to come out with a strong win.

Sharmila Kassam, deputy chief investment officer, Employees Retirement System of Texas

Though Kassam declined to name the 35 firms selected for the pipeline so far, she explained that at a grand audition of sorts was hosted at the offices of KKR in New York, over two days in late October, dubbed Launchpad NY Forum. The selected firms were interviewed by PAAMCO and ERS representatives for an hour each, at which details of the program and the individual firms’ qualities and fit for the program were discussed.“The discussions were at a high level of detail regarding the nature of the program and the characteristics of the firms seeking to participate on the platform,” Kassam said.

“The program is a unique mix of an institutional investor working with an asset manager as a partner. Particularly with U.S. pensions, there exists something of problem with innovation as it relates to investing in early-stage managers—they are most comfortable doing the same old thing. It has taken us two years to formulate PAAMCO Launchpad; it’s taken that long because when you do something innovative you have to come out with a strong win,” she asserted.

The hedge fund managers were selected for the pipeline based on a compelling investment strategy and the potential for them to grow their firms. The platform continues to seek interest in the program from more managers, Kassam said. The initial pipeline and selection of managers was based on strategies with which ERS already focuses and invests, such as Global Macro, Relative Value, Credit (long/short, structured), Event Driven and to a lesser degree Equity Long/short.

Kassam added that the next step in the program’s actualization will be the selection of the first group of managers to be funded. She said she expects funding to begin during the first half of 2019. The goal is to invest $300 million in two to three managers in the first two years of the program, she explained. The long-term goal is to have seven to ten managers on the platform at all times, she said.

Panayiotis Lambropoulos, a portfolio manager at ERS, is leading the ERS’ effort in the joint venture, with responsibility for identifying and reviewing potential investment opportunities, while Jeff Willardson, head of portfolio solutions for PAAMCO, is leading manager due diligence for prospective PAAMCO Launchpad managers.

Panayiotis Lambropoulos, Portfolio Manager – Hedge Funds, Employees Retirement System of Texas

ERS and PAAMCO unveiled PAAMCO Launchpad last June. Andrew Gitlin serves as CEO of the program. ERS is the inaugural partner with PAAMCO Launchpad, but both organizations are willing to work with other capital allocators on a co-investment basis, Kassam said. PAAMCO Launchpad is a co-investment drawdown structure. Both ERS and PAAMCO need to agree on a manager for a full due-diligence process to begin. Once an agreement is reached, PAAMCO is in charge of the entire due-diligence process, but ERS shadows that process and retains veto rights, Lambropoulos explained. For every dollar ERS is willing to invest in the manager’s commingled structure, PAAMCO will match that investment in equal or perhaps slightly higher amounts but through a separately managed account. PAAMCO Launchpad serves as the sub-advisor to PAAMCO and will be in charge of manager fee negotiations, manager sourcing, manager oversight, Board oversight, etc., on behalf of ERS or any other future clients.

PAAMCO, which is seeking other Launchpad relationships similar to ERS,  expects to deliver $3 billion in assets to emerging hedge fund managers on the platform. The goal is attract other institutions onto the platform, including pension plans, sovereign wealth plans, and the like.  The partnership also allows ERS to expand on its $1 billion emerging manager program with the goal of bringing such investments to nearly 10% of its externally managed investment portfolio.

ERS and PAAMCO believe the platform will be a compelling solution to help burgeoning managers, with high-growth potential, establish institutional-caliber firms. By combining their resources, experience and investment capital, ERS and PAAMCO believe they can provide a meaningful opportunity to hedge fund managers that have the foundation to grow into successful and profitable businesses, according to a press release issued at upon the initiative’s launch.

PAAMCO and ERS received more than 180 requests for Launchpad consideration, and more than 150 separate requests to attend Launchpad NY Forum, according to Lambropoulos.

Of the 150 requests, 84% were U.S.-based managers, 16% international (including Australia, Switzerland, U.K, France, Argentina, Brazil, South Africa, India, and China), Lambropoulos said. In total, more than 70 collective hours were spent meeting with emerging managers over two days by PAAMCO and Texas ERS representatives, he said.

The strategies of emerging managers in attendance included:  LSE (TMT, Consumer, Healthcare, and Infrastructure), EMN, Global Macro, Quant and AI, Volatility, Structured Credit, FX trading, and Emerging Markets Credit.

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