When Delta Air Lines Inc. hired Terry Blaney from the Washington State Investment Board a year ago to take an aggressive stance in building its private equity program, the buyout community trumpeted the move.
Blaney, well known for turning Washington into one of the larger LBO investors in the mid-1990s, was expected to make more buyout recommendations at Delta.
Indeed, Delta has installed a program to increase its exposure to private equity, but the pension has been cautious about investing in buyout funds.
“We felt that future returns would be better in venture capital than in buyouts because there is a different economy today than years ago,” Blaney explains.
Delta manages $11 billion to $12 billion in master trust assets and has $600 million, or 5.5%, of that capital invested in private equity, and it plans to increase the figure to between 8% and 10% in the next three years. Delta expects to commit $300 million to $400 million a year to the asset class until it reaches its allocation level. “The strategy is to move towards our target while retaining an opportunistic approach,” says Blaney, who manages Delta’s private equity program with assistant Yvonne Bates. Delta does not rely on consultants to make private equity decisions, and the pension does not make direct investments.
As a private equity investor for the last 17 years, Delta’s main goal is to achieve high returns, and at the moment, that translates into more venture investing, Blaney says. Since arriving at Delta, he has made six of the pension’s nine commitments to private equity to venture capital partnerships. Commitments, which range from early- to late-stage funds, include BCI Advisors Inc., The Centennial Funds, Frazier & Co. and Richland Ventures. The pension has invested with Summit Partners since 1984 and most recently invested in Centennial V and VI. Blaney says there are other new and existing venture investments in the pipeline, but he was unwilling to disclose them at the time.
The pension has no geographical bias, but has backed sector specific funds such as the heath-care focused Frazier and the communications and media-focused Centennial and Meritage Private Equity Fund. The pension uses the Venture Capital 100 Index as a benchmark for its venture investments, and Delta’s venture returns have continued to exceed those in buyouts, Blaney says.
“The buyout business is becoming increasingly difficult,” he says. “There is a major revolution in the U.S. economy that lends itself to venture capital investing.”
Although Delta will place an emphasis on venture investing, the pension has a longstanding relationship with buyout funds and will continue to invest in those that have “a differentiated, implementable strategy and a history of success in the industry,” Blaney says.
He says he thinks roll-ups, platforms and growth investments can work but believes many buyout firms have experience generating returns only through financial engineering.
Delta established two new relationships with buyout firms in the past year – committing to Clayton, Dubilier & Rice Fund VI, L.P. and Warburg Pincus Equity Partners, L.P., which the pension considers both a buyout and a venture capital partnership and counts as two separate investments – and it renewed with Cravey, Green & Wahlen and Welsh, Carson, Anderson & Stowe.
Blaney declined to reveal the amount of the investments but did say Delta likes to commit $30 million to $40 million per partnership, an increase from $20 million before his arrival. Delta’s private equity investments had concentrated on buyout commitments with Forstmann Little & Co. and Welsh Carson.
The pension has an open-door policy and will consider committing to any buyout firm with partners who have direct investing experience.
Blaney says he is not interested in any firm that surfs in the same waters for investments as Delta’s other buyout partners, instead preferring industry specific funds that give Delta exposure to new areas. Delta is careful to only commit capital to G.P.s whom it can trust to stick to the pension’s investment mandate.
Blaney says he sees too many examples of G.P.s who state a strategy in the partnership agreement and then stray from their plan.
“We have responsibility to our management, and when we see a plain vanilla firm buying a company in the fuel industry, and we see a firm starting a telecommunications company in Peru, it gives one pause, and it gives my boss pause,”says Blaney, referring to James Taylor, the pension’s chief investment officer.
Delta protects itself as best it can by asking for a seat on a firm’s advisory board. The airline also expects to receive no-fault divorce clauses, key-man provisions and limitations on diversification from a stated strategy in its partnership agreements.
Delta is not interested in committing capital to firms raising international funds outside of its existing relationships. The pension presently invests through Advent International and HarbourVest Partners, L.L.C.’s international fund-of-funds.