Steven LeBlanc Photograph by Jay B. Sauceda
It?s almost 10 p.m. on an October Tuesday at Brasserie 8�, a French restaurant on 57th Street in Manhattan, and the Texan in the back corner is just warming up. Steven LeBlanc, former real estate executive and senior managing director of a $110�billion pension fund, is holding forth at the lone occupied table. The restaurant takes its name from the iconic concave tower above it known as 9 West. The building has breathtaking views of Central Park and houses some of the world?s largest hedge funds and private equity firms.
A senior executive from private equity firm KKR, arguably 9 West?s most powerful tenant, has just left LeBlanc?s table, where he had been auditioning for more of LeBlanc?s business. Apollo Global Management, another huge buyout shop with offices upstairs, will have LeBlanc to breakfast the following day to make its case. LeBlanc is shopping for money managers; a few weeks later his office will announce an unprecedented $6�billion investment with the two firms on terms that reduce fees to the benefit of LeBlanc?s fund, the Teacher Retirement System of Texas.
LeBlanc, 54, is responsible for allocating $35�billion in private investments for the pension fund, which has 1.3�million members. The way the private equity bigwigs have been courting the likes of LeBlanc for his investment dollars is a major reversal from how things used to be, when pension funds were practically begging private equity funds to take their money, at whatever terms the funds were offering.
LeBlanc has another appointment waiting at the bar, the head of a Connecticut investment firm. First, though, he wants to talk about ?The Texas Way,? a manifesto of sorts he?s put together in PowerPoint format. It?s sitting on the table, detailing how he and his staff are pressing private equity to deliver better profits to their investors, with fewer of the lavish fees that have made private equity managers some of the best compensated?and most criticized?individuals on Wall Street. Under the Texas Way, buyout firms such as KKR and Apollo must vie for a place on LeBlanc?s ?premier list,? a group of top-performing managers that?s reevaluated every six months. The best of this group may gain access to even more of his pension dollars, while the bottom tier faces expulsion. It?s the opposite of the old days, when everyone, it seemed, got an investment.
The private equity business is one of the most lucrative in finance, and one of the most controversial. Investment funds buy out companies, often instituting layoffs, piling on debt, and extracting rich payouts for themselves in the process, with the ultimate goal of selling the companies for a profit. Less appreciated is that the biggest sources of private equity funds are the pension funds of working-class Americans?teachers, firefighters, and other public employees.
For years private equity has set the terms?and fees?of the arrangement. But as returns diminished after the boom and suspicion of Wall Street grew, pension fund managers began to reassert themselves. LeBlanc is among those leading the charge. He is calling for more money to be allocated to fewer managers, and for more data from those managers to be shared with investors. He?s intent on making sure everyone has the right motivation. With the recent KKR deal, management fees are lower, while better performance earns higher payouts. ?He has certainly made managers think about what they?re doing and what they ought to be doing,? says Thomas C. Franco, a partner at Clayton, Dubilier & Rice, one of the oldest private equity firms. ?He asks a lot of questions.?
It?s a crucial time for pension funds. Britt Harris, LeBlanc?s boss and the chief investment officer for the Texas teachers? fund, told his state legislature in April that the fund had a return of 14.7�percent in 2010 but an annualized return of 4.8�percent for the decade ended Dec.�31. That?s barely half the fund?s assumed 8�percent annual return. To maintain a level of funding to cover its liabilities (what it owes retirees), the Texas teachers? fund would need an annual return of 21�percent for the current fiscal year, Texas officials told the lawmakers. There is not much chance of that happening, and the Texas fund isn?t the only one in such a bind. Public pensions nationwide are grappling with about $3.6�trillion in unfunded liabilities, according to a 2010 study by Joshua Rauh of Northwestern University and Robert Novy-Marx of the University of Rochester.
Source: http://www.businessweek.com/magazine/the-people-vs-private-equity-11232011.html
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