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Why MassPRIM is allocating to diverse and emerging PE firms

'These managers are hungry,' says Katie Moore, head of emerging and diverse investing at Hamilton Lane, which will deploy $300m of MassPRIM's allocation.

Massachusetts Pension Reserves Investment Management has allocated approximately $300 million to Hamilton Lane to invest in diverse and emerging managers in private equity for the next two years.

The allocation is part of MassPRIM’s Future Initiative, a programme to invest $1 billion in emerging and diverse managers across asset classes over the next two years. The asset manager has defined emerging managers as those raising their first, second or third funds and diverse managers as those with more than 25 percent of owners, carried interest recipients, investment committee or investment teams being women, ethnic minorities or people with disabilities.

Hamilton Lane will source, conduct due diligence on, invest in and monitor emerging and diverse managers on MassPRIM’s behalf.

“We pay a lot of attention to the team dynamic and alignment in terms of compensation and the firm structure… and hitting the right balance of motivation and experience,” Katie Moore, Hamilton Lane’s head of emerging and diverse investing, told New Private Markets.

Hamilton Lane invested $3.4 billion of client capital into diverse managers from 1 January 2021 to 30 September 2021, and generated internal rates of return of 30 percent across these diverse manager investments and 24 percent across emerging managers investments, the firm said.

“These tend to be smaller funds and they have unique relationships and unique access to smaller companies, so you’re getting exposure to diversified assets, and that has been a strong differentiator relative to the larger, more established firms,” said Moore. “And these managers are hungry, they’re trying to build institutions that will grow over time and raise subsequent funds. So, they’re very returns-focused.”

Finding emerging and diverse managers within these criteria is not challenging, said Moore: 40 percent of the discretionary investment opportunities Hamilton Lane saw in 2020 were from emerging managers, and 16 percent of the discretionary commitments (by number of commitments) the asset manager made in 2020 were from diverse managers, she said. The volume of committed capital would be 24 percent, as commitments to emerging and diverse managers tend to be smaller than to established managers.

MassPRIM is a public pension fund with assets worth $95.7 billion and a 25.7 percent allocation to private markets. The public pension fund joins several US public pension funds with emerging and diverse manager programmes, including the State of Michigan Retirement System (which has a $300 million programme), the Teachers’ Retirement System of the State of Illinois, the Illinois State Board of Investment, the California State Teachers’ Retirement System, the California Public Employees’ Retirement System, Los Angeles Fire and Police Pensions, the New York State Common Retirement Fund (which has committed $7 billion to its emerging and diverse manager programme) and the Teachers’ Retirement System of Texas.