In the interest of seeking a broader opportunity set, perhaps less diluted return streams and to propel nascent investment funds and talent to the next level, several larger institutional U.S. pension plans have created or manage emerging managers programs like the one spearheaded by Portfolio Manager Panayiotis Lambropoulos at the Employees’ Retirement System of Texas (ERS) — ERS Launchpad.
Panayiotis is a Portfolio Manager at the $30 billion pension plan in Austin, Texas, with responsibilities that include sourcing, analyzing and evaluating potential third-party managers deploying all types of alternative investment strategies.
He is focused on the pension’s absolute return portfolio and opportunistic credit allocation, and he is responsible for the emerging hedge fund manager program, ERS Launchpad, which he initiated with PAAMCO Prisma.
Panayiotis started in the alternative investment industry as a research analyst at Grosvenor Capital Management in Chicago. He later joined MCP Alternative Asset Management, a multi-billion Tokyo-headquartered Investment Advisor (fund of funds) in Chicago, where he was responsible for sourcing, analyzing and monitoring hedge fund investments, and contributing to portfolio allocation decisions alongside institutional clients and top investment decision makers for some of Japan’s best and largest blue chip financial institutions.
Vailakis: Panayiotis, thanks for agreeing to share your thoughts about allocating at this time with Alternatives Watch readers.
Can you tell our readers a little bit about what led you to your role at Texas Employees’ Retirement System and what you are working on currently?
Lambropoulos: I joined ERS about six years ago. I spent a good deal of my professional career on the private side at a couple of investment firms (fund of funds) in Chicago.
I am one of five team members that focus on the Trust’s alternative investment allocation, which includes our absolute return portfolio, an emerging manager program called ERS Launchpad, and our recently approved opportunistic credit mandate, which I will be co-managing with a colleague.
Each portfolio and mandate has a distinct investment objective and role within the Trust. They collectively provide a great opportunity for the team to engage a wide range of investment strategies and structures on a global basis.
Our absolute return portfolio serves as a risk mitigator to the rest of the Trust. ERS Launchpad looks to build a “farm system” within the Trust by investing as a seed or accelerator with smaller or new funds, while the opportunistic credit mandate will be searching for unique investment opportunities across the entire credit spectrum, as the name implies, on an opportunistic basis.
Vailakis: Please speak to how you may have adjusted your approach to the ERS portfolio given COVID-19 related market conditions and cyclical considerations in the recent year or so.
Lambropoulos: Our approach hasn’t really changed. If anything, the opportunity set has increased markedly. Our thought is that following the pandemic, the challenge to raise capital has only increased, which puts investors like ERS in a favorable position. We are speaking with even more managers seeking to partner.
Vailakis: Much of your focus has been on emerging managers in conjunction with PAAMCO Prisma, through your platform ERS Launchpad. What are the aims of that program and when do you expect it to be fully implemented?
Lambropoulos: The goal of the program is to create a “farm system” for the Trust. Our aim is to, hopefully, invest with successful funds and businesses early in their life cycle, and in time to help them find their way into either our absolute return portfolio or some other part of the Trust. We want to build relationships early, to get to know a manager’s strengths and weaknesses, ability to generate returns and risk manage a portfolio. This initiative could perhaps also lead to a solutions-based mandate or product.
One of the advantages of the Launchpad structure is that ERS’ partner, PAAMCO Prisma, continues to invest through separately managed accounts (“SMAs”). This partnership gives us greater insight into a manager’s performance. Over time, this SMA data could provide better conclusions around what truly drives a manager’s returns, and we may be able to harness those sources of return in a more controlled, efficient and insulated manner. We hope to be able to take advantage of a manager’s strengths and translate those strengths into a product the market may demand or ERS may be able to utilize in a bespoke manner within the Trust.
When we started the new program in June 2018, we stated that our goal was to perhaps have in place one to three relationships within the first three years of the program. As of today, we have funded two relationships so we’re staying on track with our initial goal. Ultimately, in the long term, we would like to have a platform with seven to 10 total relationships.
Vailakis: Given more recent emphasis on the ‘S’ or the ‘social’ part of the ESG equation, are you specifically considering minority and women-owned fund managers in the context of that that program? How are you approaching additional allocations to the emerging fund sphere, taking this into account?
Lambropoulos: Certainly. When we set out to establish the parameters around how we would define an “emerging manager”, the goal was to keep it simple by focusing on assets under management and tenure or track record.
For our true seed investments, assets under management might be non-existent and the track record, including past, audited and verifiable returns may be up to three years.
For our acceleration investments, assets under management could be in the range of $300 million to $500 million and the track record is generally up to five years. In this sphere, we are looking for managers that may need that “extra push” in their capital raise or business growth. We will also consider incubations, i.e., managers that are currently at a firm and may be thinking of launching a fund, but are not quite ready to run their own business.
Lastly, we might consider a “re-emerging manager” – a manager whose assets under management have declined for reasons we feel comfortable with. In such cases, we’re looking to leverage experience that could lead to new growth and a new life for the fund.
When looking for managers, we are looking for all types of managers, including those run by women and minorities.
Vailakis: In your view, what separates successful emerging managers that ‘graduate’ to the next level, from those that start out well and then fail to raise assets?
Lambropoulos: In the long term, managers that are able to persevere through the challenges of building a sustainable business, while delivering on their stated objective – to deliver attractive risk-adjusted returns – tend to, more often than not, attract investor capital.
In simple terms, it’s about returns. However, generating good returns doesn’t guarantee additional capital or ‘graduation’.
In many instances, it’s a matter of timing or other factors that simply work for or against a manager’s ability to gain traction and raise additional capital, which I know can be frustrating for many.
Vailakis: What tips do you give emerging managers looking to be either seeded by large institutions like yours, or at least gain additional mandates?
Lambropoulos: Here is a general framework I suggest for emerging managers, or those considering launching their own fund:
1. You are running a business, not a trading desk. Know who you are and who you are not, as not all analysts and portfolio managers make good business owners.
2. Plan ahead and early for any pending fund launch and take the time to hone your message. Build an identity as a business.
3. Build an adequate runway, as it may take a long time to raise the right and adequate amount of capital.
4. Past performance may not always be indicative of future results, but it is often enough indicative of your future, so make sure you are able to provide cogent information on past returns, P&L and risk-taking decisions.
5. In today’s environment, there is increased focus on infrastructure and key hires prior to launch, but don’t over-do it. Make sure such efforts are sustainable and right-sized for the business.
6. Lastly, like everything else in life, timing is everything. Account for beta tailwinds and demand for what you are selling.
Vailakis: Thank you for sharing your knowledge, Panayiotis.