PRINT THIS PAGE Institutional Investor Profile: Greg Kulka, Director of Alternative Investments, New Mexico State Investment Council25/04/2006. Source: AltAssets. 
Greg Kulka on investing in buy-out and venture capital funds, making co-investments within New Mexico, being not too keen on generalists, and on why a consistent track record over time is the number-one criterion for any GP that is going to make the grade in his portfolio.  The New Mexico State Investment Council is planning to make new commitments of between $300m and $350m a year over the next couple of years. About 20 per cent of that will be allocated to venture, the other 80 per cent will be spread among buy-outs, special situations, mezzanine and secondaries.
How would you characterise your investment profile?
'In 1988, we started off investing in private equity with a very small percentage, something between one and 1.5 per cent, then we increased it to three per cent and in 2001 that figure became six per cent.
In buy-outs, we focus on the smaller end of the market and on the middle market. We have done some European buy-outs - mainly mid-market funds but also some of the larger funds. In total we have a little more than $13bn of capital under management, 65 per cent of which is in equities, around six per cent in private equity and venture capital, while the remainder is focused on products such as fixed income.
Geographically, our focus is on the US and Western Europe. At the moment we have about 15 per cent committed to funds in Europe and 85 per cent to funds in the US. Since we made our first commitment in 2001, the percentage of our European commitments has grown.
In Asia and Eastern Europe the risk-return characteristics are not quite where we want to see them yet. We use outside consultants to keep an eye on private equity investment opportunities worldwide for us. I do not expect that we are going to do any investments outside the US and Europe in the near term.
In Europe we do not do venture. In the US, venture is about 33 per cent of the total of our private equity portfolio. When we were permitted to start investing in private equity back in 1988, there was a statute that said we were only allowed to invest in venture capital. So for ten years all our investments in that area were in venture capital. In 1998, our mandate was extended to all the other possibilities in private equity and we have been diversifying ever since. We would like to reduce our venture capital investments further, and bring the percentage share of VC down to the 20s.
Where we have been putting money on the venture side it has been in mangers that are on fund two, or possibly their first fund where they have spun out.
In a few cases, some of the venture capital funds we have been in are not that interested in having public LPs any more. That has to do with our having to disclose returns and other information. Mostly this is an issue for old-school venture capital managers - the new managers are not as concerned with the matter.
We committed to Carlyle Mexico because we share a border with Mexico and we felt that this was a good opportunity, given the cross-border trade that happens here. We committed $25m to that fund. That's the only commitment we have made outside the US and Europe.
Currently our commitments range from $20m to $60m. We do not expect that range to change soon. We make between ten and 12 commitments a year. I would like to keep it to ten, but that depends on who is in the market. You have to strike while the iron is hot. In terms of total capital, we commit $300m to $350m a year. Currently we are seeing a lot of activity and we expect the market to be busy until the summer.
In general we are fairly opportunistic, but we also want a diversified portfolio. Recently we have been concentrating on media and financial services, and some energy and some consumer products. That will be the main focus, at least in the short-term future.
Our commitment target is around six per cent - and currently it is running between 4.5 and five per cent. As we approach that six per cent figure we will think about officially raising that number, but right at the moment we are not seriously looking at increasing the limit.
Over the past six months we have also started putting money into funds of hedge funds, mainly for diversification purposes and as a fixed income substitute.'
What is your policy on direct investments?
'We only do a few direct investments in New Mexico, but that is a relatively small amount of our overall portfolio.'
Do co-investments interest you?
'Co-investments are also something we only do within New Mexico - we do not do co-investments with any of our other funds. We have looked at expanding our co-investment activities, but we have not made a final decision on that yet; there are some pros and cons on both sides.'
How do you filter your new opportunities?
'We use outside consultants that work with our in-house team of three people. They do the due diligence for us, write a recommendation, and then it is up to us as to whether we want to do the investment. The consultants also provide us with a list of funds in the market. I get a lot of PPMs on my desk all the time from placement agents and funds, so I do not think I ever miss anybody of any significance.
I have got 137 funds in my portfolio, which represents about 85 fund managers, and I do not necessarily want to add more fund groups to the portfolio. That is why, when looking for investment opportunities, I am always keen to re-invest with teams where they are strong.
Once the consultants have given me their ideas on who they would suggest to be part of our portfolio, I meet with those groups. We then put them through a two-step approval process: it goes through our private equity investment advisory committee, and then on to the full state investment council for final approval.
We currently administer most of the process in-house, taking care of all the cash flows, capital calls and the distributions, etc, but we do rely on our advisors to do a good part of the monitoring. They attend a lot of the meetings for us. I also attend some, but I cannot be everywhere. I tend to focus more on our separate New Mexico Program, while I have the advisors focus on what we refer to as our National Investment Program, which has all the other funds in it. I make about three or four LP meetings a year in the National Program. I try to make all of the meetings in the New Mexico Program. Altogether that means about 15 to 20 LP meetings a year.'
What make a good general partner for you?
'We want to see a consistent track record over time, and that is our number-one criterion. Obviously, they should offer top-tier, top-quartile performance, consistently, fund to fund. GPs should have a special niche in which they operate, be it mid-market or buy-out in certain industries. I am not too keen on generalists, although we always have one or two in our portfolio that have shown the ability to operate in all spaces and provide a good return. Generally we concentrate on people that have special expertise.
We have not participated in any of the mega funds because we feel that they have too much money to productively put to work. The biggest funds we have done are in the area of $3-3.5bn. Generally it is somewhere between $500m and $1.5bn. We have some specialist funds in our portfolio, with a focus on the media industry, the financial sector or consumer products or energy, for example.
It is important for us to know what is happening in a fund, and if there are any problems we want to know about it sooner rather than later. The funds in our portfolio do a pretty good job in communicating with us.'
How does that contrast with bad GPs?
'A bad GP is one that does not have that all-important consistent track record, and we are very concerned about the GPs themselves and their backgrounds. Our consultants check the backgrounds of potential GPs and do in-depth due diligence with all the parties involved, from portfolio companies to other GPs and LPs from way back.
Then there are the terms. In general and on the negative side, the tide has turned against the LP in terms of negotiating things, because there is a lot of money out there. It always goes in cycles and we will have to wait to see how long this cycle plays out; it may last a while. In a climate when it is easy to raise money there is no real incentive to give on terms.'
Do you ever consider first-time funds or secondaries?
'Yes, we do first-time funds, but they are basically spin-outs - people who have worked together in the past and have an identifiable track record that goes back several years.
We have backed first-time teams, but usually there is an intersection of people who have worked together previously for a couple of years. It is pretty rare that we look at funds where the parties have never worked together at all.
This whole business comes down to people, and I have seen examples of teams where people have not worked well together, which can be a disaster. We concentrate on making sure that the team looks like it should perform well together, and we look at that from the previous experience that they had with each other.
We have done secondaries only through our funds, not directly. It has not been something we have really looked at.'
What would your advice be to first-time limited partners?
'Try to find the best of the best.
The dispersion of returns in private equity is great, much greater than in other asset classes, and you really have to do your due diligence and pick the top quartile funds. If you are only aiming at median returns, you may be better off staying in public equities.'
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