THOMSONBUYOUTSOCTOBER

22, 2OO7
/ISSUE21

Compensation
ArmsRace

BigFirms AreBlowing Away

THOt v t S O N
30 | BUYOUTSl0ctobet22,z007 www.buyoutsnews,com

PERSONALITY
PROFILE:
THOMPSON
GUIDES NYC
AABL/AH,,
PENSIONSFROM
TODIVERSIFIED
t's a rare political candidate who tall6 Retirement fund, with roughly $150billion in
private equity in his stump speedr. But assets,has a 9 percent target allocation to pri-
during his bid for the New York City vate equity and more than $10 billion invest-
comptroller's office in 2001, Wlliam ed in the assetclass.
I Thompsonfr., did just that, stressingthe
need to devotemore monev to the assetclass BoostingAlloGation
as a way to diversify the city's investment On Dec.31,2001,the daybeforethe newly
portrolio. Thompson, who also promised to elected city compnoller took office, the city
be a more "activist" comptroller, beganwork- had primarily a stocks-and-bondsportfolio,
ing toward his diversification goal almost with its pension funds weighted roughly 70
immediately upon taking office by pushing to percent in stocks and 30 percent in bonds,
raise the city's allocation to private equity. Thompson said. 'And a lot of that 70 percent
As the chief financial officer for NewYork was stock market, domestic equity. It's just
City, the comptroller is chargedwith advising kind of," Thompson shrugshis shouldersand
the mayor and City Council on Gotham's sighsas if to say,"blah." 'vVhenthe stock mar-
financial health, supervising city programs ket went up NewYork City looked good, but
and auditing its agencies.The office also over- when it went down, he added,the city looked
seesthe New York City Retlrement Systems, really bad. 'I wasn't brying to undercut the
the roughly $110 billion common pension previous comptroller,' Thompson said, refer-
fund that indudes t{ew York City Employeed ring to Alan Hevesi,who servedtwo terms in
Retirement System (I{YCERS),Teachers' the job and went on to become New York
Retirement System of the Clty of New Yort, commiftnent to a buyout fund runs between statecomptroller, a position he resignedfrom
NewYort ClgrPolicePenslonFund,NewYork $100million and $150million. amid scandalin late 2006. 'I just thought it
Clty Fire Penslon Fund and Board of When Thompson took office, the target made more sense. .. to have a more balanced
Educauon Retircment System of the Clty of for private equity was two percent, and his portrolio perspective, and we've tried to do
NewYork The comptroller sits on four of the predecessorhad guided rougily $500 million that."
five boards. toward the asset class. "Five hundred mil- During the past five and a half years,
For buyout firms, Thompson's arrival at lion," said Thompson, with eyebrows raised. Thompson has worked with the five sets of
One Centre Street in Manhattan opened the 'Out
of $80 billion?" Thompson was con- pension fund trustees, along with PCGAsset
rrault on a fresh source of capital. Given the cerned that a few consecutive years of an Management, the city's private equity advi-
pension fund's size,evena modestincreasein underperforming stock market would more sor, to boost commitrnent to buyout firnds,
target allocation meant freeing up hundreds severely damage the city's pension firnds along with some venture capital and mezza-
of millions of dollars for LBO firms. than other public funds, particularly the New nine investrnents. By mid-2003, the trustees
Thompson naturally thought the city would YorkState CommonRetircmentFund.whidr had approved a private equity arget alloca-
benefit as well "It is in our best interests to he felt was more insulated from downturns tion of five percent acrossthe city's five pen-
put our money there," he said during a recent through diversification. NYS Common sions, although individual funds may ear-
sitdown interview vnth Brryatts,noting that
the returns provided by toptier managersare
often impressive. Pension
Fund FundSize(asofAug.3il PrinhEquity
In fact, Thompson said someofthe private (ommibnenb
equity funds the city has invested in have NewYorkGg Employees'
RetircmentSystem $41.6billion $l bitlion
retumed 'in excessof 40 percent," although Teachen' RetirementSystem
oftheCityofNewYo* $37.5bitlion $701mitlion
the averageis between 15 percent and 20 per- NewYork 6ty Police
Pension
Fund $21.8bittion $614 million
cent 'The retum in a very short time has NewYorkCityFirePensionFund $7.2bitlion $180 million
been very good. And I think private equity Boardof Education
RetirementSystem
oftheCityof NewYork $2.5bittion $16.7mitlion
overall has performed well for us as an asset
dass," Thompson said- The city's average Source:Offveof Nat YorkCiLyCornptroller
32 | BUYOUTSI October22.2007

PERSONAUry
PROFILE:
ThompsonGuidesNYCPensionsFrom"Blah"To Divercified
mark a bit more or less. public advocate, the five borough presi- useda more direct approach."Ifwe seesome
Sincethen, Thompsonhas helped steera dents-who each have a fifth of one vote- thing, we're not againstpickingup the phone
total of between $1 billion and $1.5 billion and one representative each fiom the and making them aware of our concems.I've
annually to private equity. The city invests Transport Workers union, the Teamsters done it in the past," the comptroller said,
roughly 60 percent ofthe allocation in buyout union and District Council 37, the municipal adding that he tries not to go too far. "If we
funds, 30 percent in venture capital vehicles employees'union. start to squeezeand shake [buyout flrms], in
and 10 percent in mezzanine funds. Apollo All told, tfiere are roughly 40 tmstees some ways they do have the right to come
Management, The Carlyle Group, Lehman acrossthe five funds, and changing the city's back and say, 'You lorow what, the return is
Brothers Merchant Banking and Palladium overall commitment to private equity lower becauseyou pushed us to do some-
Equity Partnersare among the buyout shops thing.'"
to which the BigApple has committed. Other Thompson likes companies his pension
target allocations include five percent to real funds back to look at "ttre triple bottom line,"
estate and two percent to treasury-protected encompassing performance, worker well-
securities. Today, the city has investments being and environmental impact. InJanuary,
with 42 generalpartners, comparedwith just Thompson flled shareholderresolutionswith
sevenwhen Thompson took office. five companies,including home retailer Bed,
In June 2005, lawmakers in Albany hiked Bath & Beyond, urging them to ensure that
from 15 percentto 25 percentthe portion of overseassuppliers observe "basic human
state pension funds that can be invested in rights sandards." He also led a campaign
alternative investrnents, but Thompson has pressuringcompaniesnot to do businesswith
no plans to seekan allocation increasebefore countries listed by the U.S.StateDepartrnent
term limits force him from office in 2009. as state sponsorsof terrorism. Aon Corp.,
"It's going to take us at least another three to ConocoPhillips,Cameron, Foster rAlheeler
fouryears to hit five percent.We'll start to get Ltd.. GeneralElectric Co. and Halliburton Co.
money back in some placesand seehow well all ceaseddoing businessin Iran and Syria as
we've done,"Thompsonsaid. a result of the effort, Thompson said.
\A4rile the comptroller is clearly a fan of Thompson also supports emerging man-
private equity, he also understandsits volatil- agers.In 20o4,he spearheadeda program to
tty and seesvalue in advancing at a reason- support firms that invest in small, first-time
able pace, a view shared by another city funds guided by black, Latino and women
leader. When asked in May about boosting managers.Pensiontrusteesapproveda total
the city pension funds' performance, Mayor commitment of $175 million to invest with
Michael Bloomberg told The New York &n4 such managers. Through the program the
"There are plenty of hedge funds and LBO city has committed to Fairview Capital
flrms that give returns of 20 percent, but Partners LP,Fairview Capital Partners III LP,
their retums are very variable and they have Levine Leichtman Capital Partners Deep
risk of actually losing significant amounts of Value Fund LP,Paladium Equity Partners III
money." LP,SoleraPartnersLP and YucaipaAmerica
Alliance Fund I LP.
'A Leadershipfob"
A lifelong Brooklyn resident whose par-
Before running for comptroller, ents were a judge and a public school
Thompson served five consecutiveterms as required herding the group toward consen- teacher,Thompsondoesn't seeminclined to
presidentofthe city BoardofEducation, and sus. "It is a leadershipjob," Thompson said. leave public service anytime soon.Although
served as a tmstee on its retirement board. "And we've been collectively very successfi:l. he hasn't formally declared his candidacy
From 1985to 1990.he servedon the NYCERS It just doesn't happen in a second."And for mayor, his intentions are clear. He has
board. In addition to public service,the comp boardsdon't agreeon everything.A few years raised $3.1 million so far, according to the
troller has worked on Wall Street, serving as ago,one ofthe boardsraisedan objection and July 31 disclosure listed on the city's
a senior vice president for public finance at declined to commit to a Carlyle Group fund, Campaign Finance Board Web site. "I've
investrnent bank GeorgeK. Baum & Co.in the Thompson said, although he could not recall indicated that I have an interest in being
early 1990s. the specificsof the argument or which fund mayor," Thompson told Buyouts."The city
Even with his experience,Thompson has objeaed. He added that all the boards have has been very good to me and it's a way I
found it a challengemanaging the city's pen- committed to subsequent Carlyle Group could continue to serye."
sion funds. Unlike other pubhc pensions, funds. If elected,Thompson could still influence
where one individual makes investment deci- On the bright side,helming one of the 10 the city's investrnent in private equity. The
sions, each New York City fund is guided by largest public pension funds in the country mayor sits as a tnrstee on the boards of the
its own set of trustees who vote on their affords Thompson use of the bully pulpit. police and fire departrnents' pension funds;
fund's target allocation levels and individual Although his demeanor is more professorial the mayor also appoints other trustees, such
commitments. [n the case of NYCERS.the than pugnacious, Thompson has authored as the police commissioner,fire commission-
city's largest pension, trustees include shareholderresolutionson an array ofissues. er, finance commissioner, schoolschancellor
Thompson,the city financecommissioner,a And in the realm of private equity he has also and deputy schoolschancellor. .1.