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City of Hartford Pension Commission Via Tele-Conference Friday, April 30, 2021 9:00 A.M

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City of Hartford Pension Commission Via Tele-Conference Friday, April 30, 2021 9:00 A.M City of Hartford Pension Commission Via Tele-conference Friday, April 30, 2021 9:00 a.m. AGENDA INVESTMENT PROGRAM I. Review of Regular Meeting Minutes • Minutes of March 26, 2021 II. Status of the MERF Portfolio • Inventory of assets as of March 31, 2021 • MERF’s overall performance III. Private Equity Consultant – Meketa • Phase I Due Diligence Review: Apax Digital Fund II • Phase I Due Diligence Review: African Development Partners III • Phase II Due Diligence Review: Linden Fund V IV. General Investment Consultant-NEPC • MERF asset allocation recommendation • Updated Work Plan V. Master Custody Services Recommendation VI. Executive Session • Fienemann Road Property Update VII. Other Business • Public Comments INVESTMENTS AGENDA ITEM I City of Hartford Pension Commission Meeting Via Video-Conference Friday, March 26, 2021 9:00 a.m. MINUTES INVESTMENT PROGRAM MEMBERS PRESENT: Peter Stevens, Chairman; Gene Goldman, Commissioner; Nicholas Trigila, Employee Representative; Adam M. Cloud, Secretary and Carmen I. Sierra, Assistant Secretary STAFF PRESENT: Gary B. Draghi, Chief Investment Officer; P. Wayne Moore, Deputy Chief Investment Officer; and J. Sean Antoine, Principal Administrative Analyst OTHERS PRESENT: Jennifer Hockenhull, CFO/Director of Management, Budget and Grants; Leigh Ann Ralls, Finance Director; Lisa Silvestri, General Counsel; Chelsea Mott, Senior Project Manager; Sabri Akter, Member Services Specialist; Chay Iv, Executive Assistant; Bill Beccaro, Attorney; Kristin Finney- Cooke, NEPC; Tad Fergusson, Meketa; Gary Carter and Matthew McCue, general public Commission Chair Peter Stevens called the meeting to order at 11:44 a.m. I. Review of Minutes of the Meeting of February 26, 2021 Chairman Stevens introduced the item and asked for questions, comments or corrections. There were none. A motion was made, seconded and adopted to accept the minutes as presented. Pension Commission Minutes Investment Program March 26, 2021 Page 2 of 6 ************************ II. Status of the MERF Portfolio as of February 28, 2021 Chairman Stevens introduced the item. Mr. J. Sean Antoine, the MERF’s principal administrative analyst, reported that, at February 28, 2021, the MERF portfolio had a market value of approximately $1.1 billion and had generated a net return of 1.4% for the month, underperforming the policy benchmark by 40 basis points. Mr. Antoine then detailed sector performance, noting that the MERF’s equity portfolio generated a net return of 3.2% for the month, outperforming its custom benchmark by 50 basis points. Mr. Antoine reported that domestic equities outperformed its benchmark, while both international emerging markets and international developed equities underperformed. Regarding fixed income, Mr. Antoine reported that the MERF’s portfolio posted a -1.6% return, underperforming its benchmark by 40 basis points. He noted that sub-sector performance was mixed for the month. Mr. Antoine reported that the MERF’s asset allocation positioning was either at or relatively close to target weights for the month except for equity, fixed income, private equity, private debt, real assets and cash. He added that the MERF was within target ranges for all asset classes except for equity, private equity, real assets and cash. Mr. Antoine updated the Commission that, as of closing on March 25, 2021, the portfolio remained at $1.1 billion and noted that the MERF did receive its quarterly contribution from the City. He then referred to the NEPC February performance report and noted that for the trailing 3, 5, and 10 year periods, the MERF has outperformed. He added that the MERF’s fiscal year to date return is at 17.6% which is slightly below its policy benchmark. Discussion ensued. The Commission accepted the report for advice. III. Private Equity Consultant - Meketa Phase I Review: Linden Fund V, L.P. Chairman Stevens introduced the item. Tad Fergusson of Meketa, the MERF’s private equity consultant, provided an overview of its Phase I due diligence report for Linden Fund V, L.P. (“Linden V” or the “Fund”), a healthcare middle market focused buyout fund. Mr. Ferguson reported that, while this would be a new commitment for the MERF, Linden Capital Partners (“Linden”), the General Partner of Linden V, was founded in 2004 and its founding partners had significant experience working together. He noted that since its founding, Chicago-based Pension Commission Minutes Investment Program March 26, 2021 Page 3 of 6 ************************ Linden has invested over $2.5 billion in 160 transactions focusing on companies providing healthcare services, products and distribution. Mr. Fergusson added that Linden has generated strong results in prior investments with individual fund net internal rates of returns ranging from 8% to 33%. He stated that Linden V will target multiples of invested capital of 2.5 to 3 times on each investment. Mr. Fergusson noted that Meketa is recommending that the MERF move forward with Phase II due diligence on Linden Fund V, L.P. and would address the increase in the size of Linden V relative to prior funds, the underperformance of one of Linden’s prior funds, and the prior departure of a founder along with other standard due diligence issues. Discussion ensued. A motion was made, seconded and adopted to approve the Secretary’s recommendation to authorize Phase II due diligence on Linden Fund V, L.P. IV. General Investment Consultant – NEPC MERF Asset Allocation Options Chairman Stevens introduced the item. Kristin Finney-Cooke of NEPC, the MERF’s general investment consultant, began with a brief overview of the MERF’s February 2021 performance, highlighting the strong returns of the MERF’s public equities managers. Her presentation then shifted to the MERF’s asset allocation considerations and the corresponding long term return projections. She then provided an overview of the proposed 2021 asset mixes NEPC had provided for consideration by the MERF, noting that the portfolio had the capacity to take on more risk than the current level of 13% (as measured by standard deviation) citing the MERF’s current positioning as relatively low risk relative to its peers. To illustrate, Ms. Finney-Cooked explained that the 7.25% return scenario increased portfolio risk to 15.2%, which she noted was not recommended. She then referred to the materials, noting that in order to achieve long term (30 years) rates of return of 7.1% annually, the portfolio would need to consider the inclusion of a dedicated equity exposure in China, an increase in private equity, the reduction of public fixed income in favor of additional private credit exposure, and the reduction of hedge fund and global tactical asset allocation strategies. Discussion ensued. Secretary Cloud commented that during April NEPC will be informed of the MERF’s assumed rate of return. This discount rate would then be used as the basis upon which NEPC can work with the MERF to determine the asset allocation that is deemed most appropriate. The Commission accepted the report for advice. Pension Commission Minutes Investment Program March 26, 2021 Page 4 of 6 ************************ MERF Liquidity Study Ms. Finney-Cooke reported that the MERF currently has a 23.5% level of illiquidity in the portfolio, meaning that the portfolio is more liquid in 2021 when compared to 2020, when its illiquidity was 25%. She noted that a liquidity study is completed every year to ensure that the MERF’s expected cashflows support the allocations required for commitments to illiquid asset classes and other liquidity needs. Ms. Finney-Cooke noted that the MERF has 76.5% of its total assets available on at least a monthly basis to meet liquidity needs such as benefit payments and expenses, rebalancing, and capital calls and that NEPC has no concerns with the liquidity of the MERF portfolio. Discussion ensued. The Commission accepted the report for advice. V. Fiduciary Liability Insurance Renewal Recommendation Chairman Stevens introduced the item. Secretary Cloud asked Mr. Antoine to report to the Commission. Mr. Antoine reported that a request for proposals for fiduciary liability insurance had been sent out with one response received. He noted that General Counsel Lisa Silvestri and Sara Lowenthal, the City’s Risk Manager, and staff reviewed the response. Mr. Antoine added that the proposal received from Assured Partners (formerly Peoples United Insurance Agency) featured identical coverages to the previous policy and, while it is approximately $1,000 higher, the policy terms and conditions remain the same. Discussion ensued. Secretary Cloud added a comment expressing his disappointment that other companies did not submit proposals but noted that there aren’t many players within this small space and stated that Assured Partners is a reputable company who has done business with the MERF previously and provides the coverage needed. A motion was made, seconded and adopted to authorize the Secretary to award the fiduciary liability insurance policy to Assured Partners effective March 27, 2021 for a term of one year. VI. Annual Manager Review Meeting Reports with First Eagle Investment Management and Walter Scott & Partners, Ltd. Chairman Stevens introduced the item. Secretary Cloud reported that both First Eagle Investment Management and Walter Scott & Partners, Ltd. are top performing, longstanding managers of the MERF. He noted that communication Pension Commission Minutes Investment Program March 26, 2021 Page 5 of 6 ************************ has always been invaluable as both are able to provide insights into their philosophies and updates on their portfolios. Given that these were the first two companies to be reviewed since the start of the MERF’s diversity initiative, Mr. Draghi stated that both have recognized the importance of this effort and stepped up to provide the requested information. Mr. Moore added that he was pleased that both were eager to share their accomplishments and felt that companies are much more sensitive to the issue of diversity and inclusion than ever before. Secretary Cloud concluded by noting that he has been impressed by the timeliness and the substance of the responses received to date as well as the commitment.
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