HARRISBURG, Pa. - The Pennsylvania State Employes' Retirement System and CoreStates Financial Corp. have joined together to finance the Pennsylvania Capital Fund, which will provide debt financing to small Pennsylvania businesses, said Nicholas Maiale, chairman of the board of the $20 billion pension fund.
The pension fund has committed $50 million, confirmed Mr. Maiale. CoreStates Financial committed an undisclosed but "substantial" amount, said Christine Jones, director of CoreStates Enterprise Capital Group, Philadelphia.
The proceeds will provide expansion capital for the borrowers, which have to meet investment standards conforming with a B+ credit rating from rating agencies.
The fund has an investment return target in the low 20s, said Ms. Jones. Borrowing terms will not be relaxed. "This is an investment program," she said.
Pennsylvania State Employes' has a history of making in-state investments. According to its 1996 annual report, about $900 million was invested in Pennsylvania last year in portfolios designed specifically for that purpose.
The Pennsylvania Capital Fund was designed by the pension fund staff and Hamilton Lane Advisors, the system's private equity consultant.
CoreStates Enterprise Capital has provided subordinated lending to small business since 1988, and half of its loans are to Pennsylvania middle-market companies.
Consultant plan gets backing
CHICAGO - Private equity general partner Golder, Thoma, Cressey, Rauner Inc. is backing a former Securities and Exchange Commission attorney's plan to consolidate pension fund investment consulting firms.
Bruce Rauner, a principal with the Chicago-based firm, said his firm would commit up to $50 million in equity and arrange debt financing of about $200 million to help Edward Siedle consolidate the consulting firms.
GTCR has $1.2 billion in its current fund, so it won't need to raise capital specifically for this venture, said Mr. Rauner.
"The whole pension and benefits and retirement plan administration arena is one we have a lot of interest in," said Mr. Rauner. "We are interested in consolidating growing but fragmented industries."
Mr. Siedle thinks there is an opportunity to consolidate consulting firms because these firms need to provide information beyond performance measurement to remain viable.
"Historically, pension fund consultants have largely provided performance information to pension funds and set their fees accordingly," said Mr. Siedle. "The performance information is now readily available from custodians and others who can provide it cheaply.
"To justify their existence, consultants now have to provide interpretive information above and beyond performance. To provide this quality of service, you have to develop legal knowledge, trading knowledge, investment knowledge, which many large and small firms don't have.
Michael J. Phillips, president of Frank Russell Co., Tacoma, Wash., said Mr. Siedle is on the right track with his venture.
A current trend in the consulting industry is strategic consulting in which large clients want Russell to help implement retirement plans, not just advise them.
"If all you do is consult, you will have a problem getting into the strategic partnership business," said Mr. Phillips.
Mr. Siedle hasn't yet bid on a firm, but he said his company will invest in well-run profitable firms and avoid those that are turnaround situations.
He declined to identify potential targets, saying he expects to have the first deal under contract before the end of the year.
Fund offers 'headache' relief
NEW YORK - Willowridge Inc.'s private equity funds are too small for most pension funds to invest in, but that hasn't prevented the firm from counting pension investors among its clients.
The firm just closed Amberbrook II L.L.C. with a total of $19 million. The partnership purchases secondary interests in buy-out and venture capital funds from limited partners, said Jerrold M. Newman, principal.
Proceeds from the capital raising in the new fund went to the purchase of four venture capital partnership interests from a public pension fund Mr. Newman said he couldn't identify.
"Basically we are buying interests in older funds that are hanging around at the pension funds," he said. "Venture capital and buy-out funds typically are supposed to have a 10-year life: five years to invest and five years to liquidate.
"The investment cycle, however, has turned out to be longer than people expected," said Mr. Newman. "Most partnerships usually have three one-year extension periods. Did they (the pension funds) think they would be in there for 13 years?"
The next few years might keep Mr. Newman busy, because a record number of partnerships were created in 1987.
The Amberbrook funds typically buy partnership interests that are in the later stages of its investment cycle, said Mr. Newman. A pension fund might want to exit because the remaining piece is small and is not worth the time spent to monitor the investment.
"Often someone will decide that their return percent has largely been determined on a given fund and by holding longer, the IRR might even be reduced," said Mr. Newman. "It can get to be an administrative headache."
Willowridge's pain relief extends to the general partners.
"We make a point of being well behaved," Mr. Newman said. "We view ourselves as an uninvited guest."