State of Utah - School & Institutional Trust Funds Office (SITFO)Proposal for General Investment Consulting Services March 24, 2020

Jeremy Miller-Senior Consultant-Director of Capital Markets Research

-Shareholder-Board Member

• Joined RVK in 2006 and is based in San Clemente, CA.

• Shareholder and elected Board member of the firm.

• 18 years of industry experience.

• MBA from Yale University. B.S. in Economics from Brigham Young University.

Introductions

Matthias Bauer, CFA-Senior Consultant-Shareholder-Board Member

• Joined RVK in 2007 and based in our Portland headquarters.

• Shareholder and elected Board member of the firm.

• 13 years of industry experience—extensive experience advising sovereign wealth funds.

• Chartered Financial Analyst and is a member of the CFA Institute and the CFA Society of Portland.

• B.A. in Finance from Portland State University.

Dylan Crownover-Investment Associate

• Joined RVK in 2016 and is based in our Portland headquarters.

• 4 years of industry experience.

• Responsibilities include working with consulting teams on a variety of projects, such as asset allocation and manager structure analyses, client education presentations, and portfolio rebalancing.

• B.S. in Economics and General Science from the University of Oregon.

Becky Gratsinger, CFA-Chief Executive Officer-Senior Consultant-Shareholder-Board Member

• Joined RVK in 1994 and based in our Portland headquarters.• Shareholder and elected Board member of the firm.• Over 25 years of industry experience.• Chartered Financial Analyst and is a member of the CFA Institute and the CFA Society of Portland.• B.S. in Finance from Portland State University.

Amy Hsiang, CFA, CAIA-Director of Traditional and Alternatives Credit

-Shareholder-Board Member

• Joined RVK in 2010 and based in our Portland headquarters.

• Shareholder and elected Board member of the firm. Member of firm’s Audit Committee.

• 20 years of industry experience. Head of traditional and private credit strategies.

• Previously worked at PIMCO, ING Financial Services, and J.P. Morgan.

• MBA from Harvard Business School. B.A. with honors from the University of Chicago.

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RVK By The Numbers• $1+ trillion - Full Retainer Assets Under Advisement• 89 - Investment Professionals• 53 - Advanced Degrees and Certifications• 100% - Revenue Derived from Client Fees• 100% - Employee Ownership• 100% - Non-Discretionary Investment Consulting

2005RVK was founded to provide institutional

investors with a robust suite of customized

investment consulting services.

1985 2016RVK opens New York

office.

2010 2015

2014

RV Kuhns rebrands as “RVK” and 7 additional employees are named

shareholders of the firm.

Ownership transitions from founder, Russ

Kuhns, to RVK employees.

RVK celebrates 30 years of providing investment consulting services to institutional investors. 2008

RVK establishes Chicago office.

Becky Gratsinger is named CEO of the firm.

Firm names 14 additional employees

as shareholders.

2019

RVK Named a Quality Leader by Greenwich

Associates for 2nd

consecutive year.

RVK Firm Overview• Established in 1985, RVK provides clients with world-class

investment advice and is one of the nation’s largest and most trusted institutional investment consulting firms.

• National firm with headquarters in Portland and regional offices in New York City, Chicago and Boise. RVK serves nearly 200 clients including sovereign wealth funds, public retirement systems, corporations, endowments & foundations, Taft-Hartley funds, non-profit organizations, and other institutional pools of capital.

• RVK’s senior investment professionals are highly experienced with substantial industry experience, translating to expert investment advice through our team-centric approach.

• Since its inception, RVK has maintained an explicit no-conflicts of interest policy, aligning our business model with the interests of our clients. RVK has no financial relationships with managers, brokers, or investment products.

• RVK is committed to diversity with over 50% ownership held by women and minorities.

Sovereign Wealth Funds Experience• Commissioners of the Land Office, State of Oklahoma• Montana Board of Investments• Navajo Nation Permanent Fund• New Mexico State Investment Council• North Dakota Board of University & School Lands• Washington State Investment Board• Wyoming State Loan and Investment Board

Page 3

• RVK is the only firm among large US consultants to receive a Greenwich Associates* Quality Leader award for a 2nd

consecutive year

• This award recognizes the high level of client service RVK provides in the following areas (among others):

– Understanding of Client Goals and Objectives– Advice on Long-term Asset Allocation and Liability Issues– Proactive Advice and Innovative Ideas– Credibility with Boards and/or Investment Committees – Knowledge of Investment Managers– Advice on DC Plan Structure and Design– Client Satisfaction with Manager Recommendations– Responsiveness to Client Requests and Needs– Competitive Fees

RVK Receives 2nd Greenwich Quality Leader Award

We look forward to the opportunity of providing our award-winning service toUtah SITFO.

*Between July and October 2018, Greenwich Associates conducted interviews with 1,128 senior professionals at 924 of the largest tax-exempt funds in the US–including corporate and union funds, public funds, endowments and foundations, insurance general accounts, and healthcare organizations–with either pension or investment pool assets greater than $150 million. Study participants were asked to provide quantitative and qualitative evaluations of their asset managers and investment consultants, including qualitative assessments of those firms soliciting their business and detailed information on important market trends. RVK is one of three firms recognized in the large investment consultant category. The ratings may not be representative of any one client’s experience with RVK; rather, they are representative of those clients that chose to participate in the survey. The results are not indicative of RVK’s future performance. For more information, and to read the Greenwich article, please refer to the following URL: https://www.rvkinc.com/about/about.php.

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Express No Conflicts of Interest Policy – 100% of our revenue is derived from direct client fees – an essential component for any firm seeking to offer unbiased advice.

Solely Focused – Investment consulting services represent our sole focus and only line of business.

No Asset Management or Investment Products – No future plans to deviate away from our core business.

100% Employee-Owned – All RVK owners are active investment professionals. No passive or outside shareholders.

Shareholder Investments – During the last several years, shareholders have been reinvesting capital into the firm.

Organizational Scale – Our scale provides areas of specialization that smaller firms cannot afford while providing effective communication and access that larger firms tend to lose over time.

Unified Purpose – All senior managers and practice leaders are active consulting professionals, working directly with clients and consulting teams–from RVK’s CEO to President to the rest of the firm.

Highly Effective Team Consulting Model – Clients are serviced by teams of well-coordinated professionals, rather than a lone consultant, providing continuity of service and timely assistance.

RVK Competitive Attributes

Page 5

Industry Consolidation

This graphic to the left does not capture the most recent M&A activity:

• Merger of Aon and Willis Towers Watson earlier this year.

In RVK’s 35-year history, we have never experienced a merger or acquisition, nor do we intend to.

RVK’s independence and dependable organizational stability is unique relative to peers.

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RVK uses an effective team model to serve as an extension of staff to our clients.

Proposed Consulting Team

Jeremy Miller – Co-Lead ConsultantMatthias Bauer, CFA – Co-Lead Consultant

Dylan Crownover – Primary SupportJonathan Kowolik – Specialist Advisor

Becky Gratsinger, CFA – Senior Advisor

Additional Resources

Proposed Service Team

Performance Measurement &

Analytics

Investment Manager Research

Investment Operations Solutions

Capital Markets Research

Governance Expertise

The Core Service Team will be responsible for managing and leading RVK’s service to SITFO. Jeremy Miller:Co-Lead Consultant• Joined RVK in 2006• Client count: 10

Matthias Bauer, CFA:Co-Lead Consultant• Joined RVK in 2007• Client count: 9

Dylan Crownover:Primary Support• Joined RVK in 2016• Client count: 9

Jonathan Kowolik:Specialist Advisor• Joined RVK in 2001• Client count: 4

Becky Gratsinger:Senior Advisor• Joined RVK in 1994• Client count: 12

Note: Client loads are calculated as follows: Clients served in a Lead Consultant role are counted as (1). Clients served in a Co-Lead or Senior Advisor role are counted as (.5).

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RVK Consulting Philosophy

1. In order for us to provide clients our best advice, we need to be completely independent and objective, which means we cannot generate revenue from managing assets or selling products or services to investment managers.

2. We recognize that each client has unique needs and circumstances that require a focused effort within our organization. Exceptional client service is a key ingredient to our long-term success.

3. There is a hierarchy in the investment decision making process, and we believe it is essential to address each level of decision-making in the proper order.

4. We should help clients focus their efforts on those factors that are most reliable over the long-term, such as appropriate strategic asset allocation, investment policy discipline and rebalancing, structural market biases, and cost control.

5. Peer group comparisons are interesting and good information but should not drive the decision-making process.

“Successful investing is like playing tennis. You don’t win by taking the best shot every time. You win by

avoiding unforced errors.”

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Manager(s)Private

Investment Decision-Making Hierarchy

Assets vs. Spending

(Intergeneratio-nal Equity)

SITFO Assets

Global Equity(Capital

Appreciation)

Fixed Income(Capital

Preservation)

Diversifiers(Alpha)

Public

Private

Core/IG

Non-Core/HY

Hedge Funds

Other

USIntl/EM

DirectFoFs

USIntl/EM

PublicPrivate

LiquidIlliquid

DirectFoFs

Active/PassiveActive/Passive

Manager(s)Manager(s)

Active/PassiveActive/Passive

Active/PassiveManager(s)

Active/PassiveManager(s)

Manager(s)Manager(s)

Intergenerational Equity Study Asset Allocation Study Asset Class Structure Studies• Assesses status of

intergenerational equity• Models general risk and

return parameters• Links Investment Policy,

Capital Inflows, and Spending

• Models specific targets to asset classes

• Used to select overall target allocation

• Uses passive assumptions

• Implementation guide with targets to sub-asset classes

• Mix of active and passive investments determined

• Optimal mix of managers• ESG

Real Assets(Inflation)

Financial Assets

Real Assets

PublicPrivate

Public

Active/PassiveManager(s)

Active/Passive

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Intergenerational Equity

Page 10

Investment Initiative: Intergenerational Equity Study

SITFO is charged with investing School and Institutional Trust Lands Administration (SITLA) revenues in a manner that supports the distribution policy in perpetuity while providing for intergenerational equity between current and future beneficiaries1.• SITFO’s long-term investment objective is CPI + 5%. The primary return objective is to maintain

purchasing power while sustaining the current distribution amount which is a maximum of 4%.

RVK believes all significant investment decisions should be evaluated within the context of meeting these objectives. Establishing a framework to evaluate these decisions can be accomplished with an Intergenerational Equity Study and monitored both historically and prospectively using a dashboard.

Key Principles of Intergenerational Equity:1. Strives for egalitarian equity between present and future generations of Utah residents.2. Aims to provide a safeguard that citizens of tomorrow have the same opportunities and

purchasing power as citizens of today. 3. Achieved by retaining and investing proceeds from non-renewable natural resources as part of a

sustainable spending policy.

1Investment Policy Statement, SITFO, July 2019.

Conducting an Intergenerational Equity Study is the most critical investment initiative the Fund should undertake within the next year.

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Investment Initiative: Intergenerational Equity Study What is an Intergenerational Equity Study?

1. Enables SITFO to monitor the Fund’s ability to achieve its vision over the long-term.– The study will be updated when considering significant investment decisions and on a

periodic basis to serve as a “dashboard” for monitoring and communicating progress—internally and externally.

2. Uses a holistic approach by assessing the fiscal health of the Fund by incorporating anticipated natural resource revenues and spending policy relative to the prospective future demands on those assets.

3. Ability to dynamically examine the impact of potential changes and amendments impacting the long-term fiscal health of the Fund including:

– Investment Decisions (e.g. asset allocation changes, asset class additions)– Anticipated Future Market Environments (e.g. declining oil prices, rising inflation)– Constitutional Amendments – Legislative Action

Page 12

Intergenerational Equity StudyDeep experience with intergenerational equity evaluations including the probability of meeting fund objectives over numerous time periods.

Page 13

Intergenerational Equity Study

Page 14

US Sovereign Wealth Fund Survey

Page 15

US Sovereign Wealth Fund (SWF) Survey• RVK’s most recent US SWF survey included relevant comparisons of governance structures,

investment objectives, constraints, asset allocation, and performance results

• Although the funds surveyed have similar long-term objectives, there is a surprisingly high degree of differentiation in terms of governance structures, asset allocation approaches, spending policies, and reserve fund mechanisms making a pure performance comparison difficult without more granular insights

$0.0$10.0$20.0$30.0$40.0$50.0$60.0$70.0

$ Bi

llion

US SWFs - Permanent Fund Assets

Utah SITFO AUM: $2.5 BillionMedian Peer AUM: $4.5 BillionAverage AUM: $12.5 Billion

Data is as of June 30, 2018. Assets reflect permanent fund assets only and may differ from total AUM reported by the entity.

Page 16

US SWF Survey – Portfolio Allocation• The composition of the “risk” asset portfolios also vary widely, primarily in their allocations to

equity vs alternatives. • Alternatives includes real estate, private equity, hedge funds, and infrastructure.

28%

44% 40% 34%

66%

42%

60%

36%

61%50% 51%

27%33%

26%35%

61%38% 39%

45%

7%

30%8%

25%8%

19% 11%14%

6%TexasUnivFund

AlaskaPFC

TexasPSF

NorthDakota

SLB

IdahoEFIB

NMSIC AlabamaTF

UtahSITFO

ArizonaSTO

NDLegacy

MN PSF WSTO -PMTF

CLO ofOK

WSTO -CSPLF

LouisianaEQTF

MontanaBOI

Allocation to Public Equities and Alternative Assets as of June 30, 2018

Equity Allocation Alternatives/Other Allocation

79%

6%

89%82% 80%

74% 73%68%

62% 61% 58%

51%45% 44%

40%35%

Allocations shown represent actual allocations as of June 30, 2018, not target.Allocation to “Other” includes real return, GTAA, MLPs, risk parity, commodities and other alternative investments not broken out.

Page 17

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

5-Year Rolling Performance

Median Utah SITFO Top Performer

US SWF Survey – 5 Year Performance

Alaska PFC

Utah SITFO

IdahoEFIB

CLO of OK

Montana BOI

Idaho EFIB

Texas PSF

WSTO CSPLF

Montana BOI

Montana BOI

CLO of OK

Utah SITFO

Utah SITFO

Performance is gross of fees. Performance for North Dakota SLB is net of fees prior to 2010.

Page 18

US SWF Survey – Efficient Frontier

The expected risk and return of each US SWF is modeled below using RVK’s 2019 capital markets assumptions, and Fund asset allocations as of June 30, 2018.

1

2

3

4

5

6

7

8

9

10

PMTFCSPLF

Arizona STO

Alabama TF

Alaska PFCIdaho EFIB

NMSIC

MN PSF

Texas PSF

North Dakota Legacy

North Dakota SLB Texas Univ

Fund

CLO of OK

Montana BOI

Louisiana EQTF

Utah SITFO

3.00

3.50

4.00

4.50

5.00

5.50

6.00

6.50

7.00

7.50

8.00

8.50

9.00

9.50

10.00

3.00 5.00 7.00 9.00 11.00 13.00 15.00 17.00 19.00

Ret

urn

(Ann

ualiz

ed, %

)

Risk (Annualized Standard Deviation, %)

Page 19

Asset Allocation & Risk Management

Page 20

• The asset class behaviors that we attempt to estimate in our capital market assumptions – risk, return, and correlation – are widely accepted as the most powerful drivers of the total fund return over the long run.

• We deploy a dedicated CMA team for initial research and data collection. Then, designated teams of RVK professionals focus on each asset class. We ensure that all of our consultants formally review, critique, and ultimately support our capital market assumptions.

• The forecast horizon is for long-term periods, typically 10-20 years.• Return assumptions are generally index-based and assume no investment manager alpha. • Annual updates are typically gradual and incorporate historical performance, current valuations,

as well as the overall economic environment.

Yield (Income)

Inflation Assumption

RealGrowth

Valuation Change

Approach: The sum of the building blocks equals expected return*

Expected Return Building Blocks

*For illustrative purposes only. While the above factors generally inform the direction and magnitude of the capital market assumptions, RVK also considers qualitative, triangulation, and other factors as needed, when arriving at final assumption values. Real Growth includes GDP and profit margin growth.

Capital Market Assumptions (CMAs)

Page 21

RVK Perspective on Asset Allocation

Guiding Principle: Establishing a long-term allocation that is congruent with a portfolio’s underlying return objectives, risk tolerance, and investment constraints is the most critical investment decision that a Board and/or Committee will make. It is unlikely that successful investment decisions in other areas (e.g., manager selection) can make up for an asset allocation that is not properly aligned with a portfolio’s underlying objectives.

Common Allocation Errors:

1. Overconfidence in Tactical Abilities – Many investors overestimate their ability to navigate the ebbs and flows of markets over short time periods. While it is highly probable that risk seeking assets (e.g., equities) will outperform capital preservation assets (e.g., fixed income) over a long period of time, it is extraordinarily difficult to predict relative performance over short periods of time.

2. Overestimation of Risk Tolerance – The stated risk tolerance of investors often differs from their actual risk tolerance when faced with a major market dislocation. It is one thing to say that you can tolerate a 50% decline in equities; it is another thing to sell fixed income and buy equities when it actually happens.

3. Failure to Exercise Patience and Discipline – Building on the previous point, sticking to a long term allocation (and rebalancing as needed) requires patience and discipline. This is most important in distressed markets when fear of loss is high, as well as exuberant markets when fear of regret tempts one to engage in imprudent risk taking.

Page 22

Key Elements of Asset Allocation Evaluation

1. Mean Variance Optimization (MVO) Framework – RVK uses an MVO analysis as aframework for discussing the asset allocation decision. While the model has importantlimitations, it provides a useful framework for discussing the risk/return trade off of differentportfolio allocations.

2. Monte Carlo Simulation – For each potential portfolio allocation, we use Monte Carlosimulations to show different potential outcomes ranging from worst case to best case overvarious time periods. The simulations can be combined with spending rate projections toinform the decision on spending rate sustainability.

3. Downside Analysis – Understanding the downside risk is critical when determining an optimaltarget allocation. Committees must truly understand the risk of a major downside event and beprepared to take action during these periods (i.e., adding to equites) when one’s instinctsusually encourages the opposite.

4. Rebalancing Policy – We believe that having a rebalancing policy incorporated into theinvestment policy statement is best practice. This is most useful when extreme market eventsoccur, as it can help mitigate counterproductive instincts.

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Asset Allocation StudiesMean Variance Optimization

Page 24

Asset Allocation – Understanding the Full PictureExperience optimizing the allocation of the investment portfolio to meet long-term objectives while giving appropriate consideration for each State’s overall portfolio, inclusive of the physical assets.

Page 25

Successful risk management is more than simply measuring volatility.

1. Governance: Establish and document a structure and process to address risk management at both the Investment Staff and Board levels.

2. Implementation: Integrate at point of decision making; from both a top down (asset allocation) and bottom up (manager selection) perspective.

3. Measurement: Understand and manage all risk present in the portfolio, rather than attempt to eliminate it; measurement should not be confused for management, but the former is a large component of the latter.

Risk Management: Key Tenets

To adequately address best practices, investors must focus on:

Page 26

Asset/Liability Studies

Asset Allocation Studies

Monte Carlo Simulations

Cash Flow/Liquidity

Analysis

MPT Stats (beta, downside risk,

etc.)

Risk Management: Top-Down Assessment

Page 27

Manager Compliance Reporting

Custodian Performance

Standards

Securities Lending Risk Controls

Transition Management

Investment Manager Due

Diligence

Risk Management: Bottom-Up Assessment

Page 28

Best Practice: Measure, monitor, and manage risk at the total portfolio, asset class, and manager levels by evaluating quantitative and qualitative risks present within the portfolio.

Measurement:

• Quantitative risk measurement includes, but is not limited to: standard deviation, value at risk, expected shortfall, tail risk, factor modeling, surplus risk, tracking error, attribution analysis, active share, etc.

• Qualitative risk measurement includes, but is not limited to: operational, regulatory, legal, liquidity, counterparty, reputational, fiduciary, etc.

• Obtain risk management reports from consultants and leverage other vendor relationships to provide ongoing and meaningful education on total fund risk.

Risk Management: Measurement

Page 29

Investment Manager Research

Page 30

Amy Hsiang, CFA, CAIADirector, Traditional/Alt. Credit20 Years Industry Experience

Austin Head-Jones, CFA, CQFAlt Credit/Private Debt

Sonia RuizCore/Core+/Stable Value Global/Unconstrained

Aaron BirmanHigh Yield/Bank Loans/LDI Convertibles/Money Market

Justin OutslayAlt Credit/Private Credit

Elijah McGowenGeneralist

Steve Hahn, CFADirector, Private Equity/Multi-Asset/ Real Estate23 Years Industry Experience

Reed Harmon, CFAGTAA/Div. Inflation

Alexander LeikenMulti-Strat Hedge Funds

Kirby Francis, CFAPrivate Equity/MLPs

Joseph Delaney, CAIA, FRMReal Estate

Scott MaynardReal Estate

Nicole MadauSr. Operational Due Diligence Analyst

Michael Pellatz, CAIAGeneralist

Taylor BowmanGeneralist

Matt SturdivanDirector, Traditional/Alt. Equity9 Years Industry Experience

Britt VriesmanInternational/Emerging

Sam Kavehrad, CAIALong/Short Equity

Carson HollyoakGeneralist

Kate AllenGeneralist

Fixed Income Team Alternatives Team

Joe Ledgerwood, CFADirector of Manager Research17 Years Industry Experience

Sr. Leadership Average Experience17 years in the industry

10 years at the firm

Team Credentials6 CFA Charterholders4 CAIA Certifications1 FRM1 CQF

Equity Team

Dedicated Investment Manager Research Team

Page 31

• Searches customized to meet client needs• Top-tier managers identified• Proprietary databases and tools – competitive advantage in gathering and reviewing data• Client access to extensive manager universe• Open architecture – ideas provided by clients are researched

• Asset allocation guidelines

• Manager structure analysis

• Client goals

• Asset allocation guidelines

• Manager structure analysis

• Client objectives

• Performance consistency

• Risk/Return profile

• Peer ranking

• Investment philosophy

• Risk control• Resource depth• Team stability

• Adherence to style

• Source of returns• Incentive

structure

Establish Criteria

Quantitative Analysis Qualitative Analysis Interview Manager Selection

Investment Manager Research Process

Ongoing Monitoring:• RVK’s research team continually monitors all managers of which our clients have exposure.• All material changes or events regarding the manager or strategy are immediately disseminated to all consultants

and then promptly communicated to clients in the method they prefer (e.g., phone call, email, memorandum, etc.).

Overview:

Page 32

Investment Manager Evaluation Philosophy Investment Manager Ranking System

We look for healthy and stable firms that are preferably owned by employees or have a strong performance-based incentive. We review ownership structure, regulatory compliance, insurance levels, client base, asset base, etc.

FirmFirm

We prefer experienced and consistent teams of professionals that are appropriately staffed, but we recognize this can be structured in a variety of ways. We review experience in the industry, experience at the firm, credentials, historical changes in structure, etc.

TeamTeam

We look for long-term stability, consistency of application, alignment with the firm, and team resources employed to successfully manage the product. We review stated philosophy and process, historical changes made, alignment with the team structure, portfolio characteristics, risk controls, and historical changes made to portfolio construction.

ProcessProcess

We concentrate our research on firms that have demonstrated consistent performance in line with the returns expected given the philosophy/process employed. We review consistency of rolling period excess return, volatility, outlier performance periods, and multiple risk factors.

PerformancePerformance

We prefer products that have enough assets to ensure that their track record is repeatable at a significant asset base, yet not so large that the process can no longer be employed appropriately. We review the asset history and the rate of change.

Product AssetsProduct Assets

Demonstrates substantial stability and strength in firm team, process/philosophy, performance and assets. Considered a best idea within the peer group and available for new client search activity. This rating requires that due diligence is complete, including an on-site visit by our manager research team.

PositivePositive

Institutional quality and investable product, yet not considered best idea within the peer group. However, a neutral product may be appropriate for specific roles when constructing an asset class composite.

NeutralNeutral

Lacking strength and/or stability across our basic tenets of research. Often a result of a significant event, such as a key personnel turnover. Manager research team indicates what areas of weakness should be improved upon: firm, team, process/philosophy, performance or assets.

NegativeNegative

Top research candidate identified through manager meetings or initial product review, primary focus of our manager research efforts.

ResearchResearch

Manager Evaluation/Ranking Process

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Deep pool of available products:• Over 450 Positive ranked products across 160 firms covering all major asset classes

Client benefits:• Access to an extensive manager universe• Peace of mind knowing that managers are continually monitored • Proactively made aware of new investment ideas or strategies

Five Year AverageAs of 12/31/2019

Number of Searches / Placements 147

Assets Placed $16 billion

On-Site Manager Visits 178

In-House Manager Meetings 1,248

Manager Searches, Perpetual Due Diligence

Page 34

Manager Evaluation Database• Proprietary ranking, notes, strategy summary, on-site visits. Merges views with client exposure.

eVestment• Investment manager research system that includes separate account, commingled fund, and mutual fund

manager databases and peer groups—proprietary implementation.

Morningstar• Investment manager research database that includes commingled fund and mutual fund manager

databases, peer groups, holdings based attribution.

AltInvest• Proprietary system that calculates performance and statistics on alternative investments.

RADAR• Proprietary web based questionnaire system for Real Estate, Private Equity, and Hedge Funds.

Bloomberg• Monitor and analyze real-time financial market data.

MPI Stylus• Investment analytics system that performs style analysis, risk analysis, performance analysis, and measures

investment efficiency—proprietary implementation.

PARis • Investment analytics system that delivers performance measurement, risk attribution, and customized,

presentation-quality reports on traditional investments, total fund and sub-composite level—proprietary implementation.

Summary of Systems & Databases

Page 35

Manager Fee NegotiationRVK regularly helps clients negotiate fees

• Considerations include size of mandate, capacity constraints of the asset class, recent performance, strategy size, and asset growth.

RVK either executes the negotiation or arms the client with data• Range of fees within the asset class at several mandate sizes.• Strength of firm, product: asset trends, performance trends, known discounts.

Recent examples• During a recent search for a $400M global fixed income mandate, RVK, in response to our client’s desire,

negotiated the launch of a new product by one of the finalist firms. The benefits of the proposed structure being a meaningful fee break and operational efficiencies for both the current and future clients. Furthermore, we were able to negotiate an additional 20% savings on the managers’ proposed fee. As context, the contracted fee provides a 49% discount versus the median fee for mandates in this asset class.

• Working in tandem with one of our clients, RVK assisted in re-evaluating the fee structure on a $1B global equity mandate. Specifically, this led to successfully negotiating the performance fee on this mandate down by 25% and incorporating a fee cap. We also proposed a benchmark change to accurately reflect the opportunity set (MSCI World to ACWI) to which this new performance fee would be evaluated against, which was approved.

Recommendations• Always assume negotiation is possible, regardless of Most Favored Nations (MFN) clause. • Negotiate fees prior to finals, ask for best and final.• Request relationship pricing if relevant.• Understand your leverage in the negotiation.

- Seeding a new strategy vs. last mandate into a closing strategy.

Page 36

Depth of Experience with Private Credit Clients

Representative Private Credit Client List

RVK Private Credit AUA and Client Growth• RVK has been providing private credit research for clients over the past two decades, and on a dedicated basis

since 2013.• RVK’s private credit assets under advisement has grown steadily, with a current total committed value of $7.5

billion across 17 clients

• Pinnacol Assurance• Texas Municipal Retirement System• Teachers' Retirement System of Illinois• Blue Cross and Blue Shield of Minnesota• National Rural Electric Cooperative Association• California Field Ironworkers Pension Trust• Santa Barbara County

• North Dakota Board of University and School Lands• Kansas City Police Employees' Retirement Systems• Southern California Local 831 Employer Pension

Trust• Shimon Ben Joseph Foundation

RVK Private Credit Committed AUA and Client Growth

Data represents all RVK clients with private credit exposure as of 12/31/2019

0

2

4

6

8

10

12

14

16

18

$0

$1

$2

$3

$4

$5

$6

$7

$8

2013 2014 2015 2016 2017 2018 2019

RVK

Priv

ate

Cre

dit C

lient

s

Priv

ate

Cre

dit C

omm

itted

AU

A ($

B)

RVK Private Credit Committed AUA ($B) No. of RVK Private Credit Clients

Page 37

Research: Market Cycle Approach

0%

20%

40%

60%

80%

100%

Growth Slowing Recession Recovery Growth

Direct Lending Asset-Backed / Real Estate Debt Specialty Finance Distressed / NPLs

Asset Class Growth Slowing Recession Recovery Growth

Direct Lending 35% 10% 5% 25% 35%

Asset-Backed / Real Estate Debt 25% 40% 35% 20% 25%

Specialty Finance 35% 40% 20% 30% 35%

Distressed / NPLs 5% 10% 40% 25% 5%

Presented for illustrative purposes only. Client-specific recommended allocations depend on individual investment goals and constraints.

Page 38

Research: Current Landscape and RVK ApproachExtended credit cycle combined with significant inflows of investor capital has resulted in:• Overcrowding of traditional/established private strategies (i.e., middle market direct lending) • Very little distressed activity• Compressed yields across traditional private credit• Less downside protection across traditional strategies due to looser investor protections

RVK believes a disciplined and dedicated focus on specific sector and strategy allocation is essential. Currently we are emphasizing investment in: • Asset-backed securities, due to their superior downside protection• Senior debt, due to its attractive risk-adjusted relative value vs. junior debt• Specialty finance and focused niche strategies, due to lower levels of competition and superior

risk-adjusted returns vs. most mainstream offerings

We are currently tilting away from:• Traditional direct lending strategies, due to overcrowding• Junior debt, due to its generally less attractive risk-adjusted return

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Private Credit Team Stats in 2019 • Funds Reviewed: 217• Manager Meetings: 143 (29 onsite)• Full Due Diligence Completed: 5

Funds Sourced by Geography

USA: 64%Europe: 18%

Asia Pacific: 5%

Global: 13%

Funds Sourced by Strategy, Geography, and Fund Size include all Private Credit funds reviewed by RVK since 2019

Funds Sourced by Size

3%

32%

33%

25%

7%Micro: < 200

Small: 200-500

Mid: 500-1,000

Large: 1,000-3,000

Mega: >3,000

26%

12%

8%16%

16%

11%

11% Direct Lending

Real Estate Debt

Asset-Backed Debt

Special Situations

Specialty Finance

Distressed Debt

Other

Funds Sourced by Strategy

Research: RVK Private Credit Sourcing Summary

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Research: Investment Due Diligence

Initial Document Review

High Level In-Person Meeting / Conference

Call

Quantitative Analysis Geography & Sector Review

On-site

Stage & Strategy Peer Comparison

Reference Calls & Terms Analysis

Internal Alternatives Committee & Client Recommendation

Preliminary review of sponsor and strategy Performance relative to peers

Initial conference call to better understand strategy, lead investment professionals, and unique value-add relative to peers

In-depth quantitative analysis prior to onsite including sensitivity analysis, risk of loss, and attribution (lead personnel, sector, geography, size, profitability, leverage levels, and others depending on strategy)

Extensive onsite covering strategy, investment results, portfolio review, leadership, compensation, incentive structure, and back office

Parallel review of expected geography and sector Evaluation of competitive landscape within the target market

of the strategy (other general partners that focus on the area, performance relative to peers)

Reference calls to current and former limited partners, portfolio companies, and intermediaries

Review of fund terms relative to market norms

Review by RVK Alternatives group to ensure comparison to other asset classes and opportunities

We take a consistent approach to evaluating private credit opportunities.

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Research: Investment Due DiligenceDue Diligence Report • Upon the conclusion of RVK’s

due diligence process, the team will publish a Due Diligence Report

• This report provides a thorough evaluation and investment recommendation for the Private Credit Fund

Report Components Summary of the Opportunity Merits/Issues to Consider Investment Recommendation Firm Background Current Market Overview Investment Strategy and Process Quantitative Performance Analysis Reference Calls Review Biographies of Key Personnel Summary of Fund Terms

Sample Fund

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Research: Operational Due Diligence

Core Tenets• An investment mandate is only as good as the

manager’s ability to execute the mandate in a way that protects investors from fraud and operational failure.

• To properly and objectively assess operational risk, the ODD process must be performed independently of the investment due diligence process.

External Failure

Counterparty & Vendor

Management

Internal FailureOperational Processes

Trading ProcessesIT Systems

BCP and Cyber Security Plans

FraudIndependent ValuationSolid Cash Controls

Proper Trading Oversight Segregation of Back/Middle & Front Offices

Process• RVK’s ODD team conducts a full scope review by focusing on the three key areas

of risk: Business, Legal and Operational. Our process includes both a “desktop” review and onsite assessment of each manager.

• RVK details our findings and issues an independent opinion in a comprehensive report that is made available to clients upon request.

Operational due diligence (ODD) considers non alpha generating activities that support the business of investing, and includes the review of a wide range of operational risks across the firm.

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RVK “Best Ideas” – Core Private Credit

Ares Pathfinder Fund Deerpath Capital V PIMCO PIF Varde Asset

Lending Fund II

Type Specialty Finance Direct Lending Multi-Strategy Specialty Finance

Style Asset-Based Finance Lower Middle Market Performing Private

Credit LoansAsset-Based

Finance

Geographic Focus North America US Primarily US and

Europe Global

Fund Target Size $2 Billion $1 Billion Evergreen - $680MAUM (As of 12/2019) $500 Million

Term Drawdown - 7 Years Drawdown - 8 Years Evergreen –Currently Open Drawdown – 6 Years

Target Net Return

11-13% 1.50-1.75x MOIC

6-9% (Unlevered)10-15% (Levered)

8-12% 6-7% Annual Yield 10-11%

Fund Leverage None Optional (3x Max) 1.5x Target (2x Max) None Expected

Management Fee 1.25% 1% 1.25% with a

0.25% Admin Fee 1.25%

Incentive Fee 20% over 6% hurdle 10% over 5% hurdle;15% over 8% hurdle

12.5% over 5% hurdle 15% over 6% hurdle

Capitalization Structure Primarily Senior First Lien Senior Across the Capital

Structure Primarily Senior

AnticipatedFinal Close Year-End 2020 Mid 2020 Evergreen –

Currently Open Mid 2021

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RVK “Best Ideas” – Opportunistic Private Credit

LCM COPS IV Locust Point Private Credit Fund II

Oaktree European Capital Solutions II

Monarch Capital Partners V

Type Specialty Finance Real Estate Debt Special Situations Distressed Debt

Style Consumer and SME Credit

Subordinate SeniorHousing Debt

Bilaterally Negotiated Asset Backed Debt

Event-Driven Distressed

Geographic Focus Pan-Europe US Continental Europe Primarily US and

Europe

Fund Target Size €4 Billion $475 Million € 1 Billion $1.5 Billion

Term Drawdown - 10 Years Drawdown - 6 Years Drawdown - 7 Years Drawdown - 7 Years

Target Net Return 10-12% 12-14%

1.4x-1.5x MOIC 10-12% 10-20% 1.5x-2.0x MOIC

Fund Leverage None None None Expected None

Management Fee 1.75% 1.75% on committed 1.25% 1.75%

Incentive Fee 20% over 7% hurdle 20% over 8% hurdle 15% over 6% hurdle 20% over 8% hurdle

Capitalization Structure

Across the capital structure Subordinate Senior and

UnitrancheAcross the capital

structure

AnticipatedFinal Close Mid/late 2020 Mid 2020 Mid 2020 Year-End 2020

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RVK & SITFO –A Productive and Collaborative Partnership

Page 46

1. Extensive Experience Serving Sovereign Wealth Funds Intergenerational Equity Study Global Sovereign Wealth Fund Report Success in facilitating constitutional amendments and legislative action

2. Asset Allocation Depth and Expertise Proprietary capital markets research and asset class assumptions Robust intergenerational equity modeling and simulation Robust asset allocation modeling and simulation software

3. Depth of Manager Research and Monitoring Resources Dedicated staff of investment professionals Robust 3rd party and proprietary analytical resources Distributed due diligence leveraged from vast client and industry network

4. Client Education and Meeting Facilitation Extensive training and monitoring of consultant facilitation skills Extensive internal repository of Board training materials Thought leadership and strategy studies

5. Commitment to Management of Conflicts of Interest Client fees serve as our sole revenue stream Uncompromising restriction against acceptance of any gifts from 3rd party vendors

RVK Value Proposition

Page 47

RVK Code of Conduct

Page 48

Guiding PrincipleAt RVK, Inc., it is essential that all employees conduct business with integrity and professionalism. Therefore, we aim to provide our clients with the highest level of service without a real or perceived conflict of interest.

Contact with Other Financial IntermediariesThe cornerstone of our business philosophy is to provide our clients with the highest standard of investment consulting in our industry. We take pride in the fact that we do not have any relationships with investment managers, or other service providers that create conflicts of interest. In keeping with this philosophy, RVK’s Code of Conduct and Ethics policy requires that employees observe the following guidelines:

1. Employees do not accept business gifts from investment managers, custodians, or any organizations in investment-related fields. This includes gifts, travel, or anything that compromises the firm’s commitment to conflict-free investment consulting.

2. Employees will not become involved in situations that compromise the firm’s or the employee’s independence and objectivity.

3. Each of the firm’s employees is expected to protect the confidentiality of the client, firm, and third-party information at all times. Employees will be held personally accountable for safeguarding information that is not readily available in the public domain.

Contact with ClientsStrategic investment consulting is RVK’s only business, and helping clients meet their investment objectives is our utmost goal. We offer clients a wide range of non-discretionary investment services in accordance with terms specified in each client’s written agreement. Employees who consult and render services to clients are committed to being completely familiar with and understanding each client’s investment goals and objectives, helping them to better understand and monitor the results of their investment program, and generally helping our clients meet their short- and long-term objectives.

RVK Code of Conduct and Ethics Policy

Page 49

Questions the Securities and Exchange Commission and the Department of Labor recommend all plan fiduciaries ask their investment consultants.

1. Are you registered with the SEC or a state securities regulator as an investment adviser? If so, have you provided us with all disclosures required under those laws (including Part II of Form ADV)?

Yes, our firm is a Registered Investment Advisor with the Securities and Exchange Commission and has provided all clients with all applicable and required disclosures. Our SEC Form ADV, including Parts I and II, are available upon request to any client at any time.

2. Do you or a related company have relationships with money managers that you recommend, consider for recommendation, or otherwise mention to the plan for our consideration? If so describe those relationships.

We have no relationships with any money managers that we recommend or consider for recommendation. One hundred percent (100%) of our revenues are derived from cash-based fees for investment consulting provided directly to fund fiduciaries. Our firm’s Code of Conduct and Ethics policy requires that our employees are not to accept gifts during the course of any business relationship that could affect our loyalty to clients.

3. Do you or a related company receive any payments from money managers you recommend, consider for recommendation, or otherwise mention to the plan for our consideration? If so, what is the extent of these payments in relation to your other income (revenue)?

We do not receive any payments from money managers that we recommend or consider for recommendation.

4. Do you have any policies or procedures to address conflicts of interest and to prevent these payments or relationships from being considered when you provide advice to your clients?

Yes, we have a Code of Conduct and Ethics Policy.

SEC and DOL Questions

Page 50

5. If you allow a plan to pay consulting fees using a plan’s brokerage commissions, do you monitor the amount of commissions paid and alert plans when consulting fees have been paid in full? If not, how can a plan make sure that it does not over-pay its consulting fees?

No portion of our fees are paid by brokerage commissions. We do not derive any revenue or profits from commission recapture programs.

6. If you allow plans to pay your consulting fees using the plan’s brokerage commission, what steps do you take to ensure that the plan receives best execution for its securities trades?

Not applicable. One hundred percent (100%) of our revenues are in the form of cash payments directly from our clients.

7. Do you have any arrangements with broker-dealers under which you or a related company will benefit if money managers place trades for their clients with such broker-dealers?

No, we have no such arrangement with any broker-dealer.

8. Will you acknowledge in writing that you have a fiduciary obligation as an Investment advisor to the Plan while providing consulting services?

Yes. RVK will acknowledge in writing that we have a fiduciary obligation as an investment advisor to the plan while providing consulting services.

9. Do you consider yourself a fiduciary under ERISA with respect to the recommendations you provide to a plan?

RVK is a Registered Investment Advisor, and we view ourselves as co-fiduciaries with respect to relationships with our clients. However, our role as a fiduciary is narrowly defined as we do not have discretionary authority to manage assets. The investment decisions rest with our clients.

10. What percentage of your plan’s clients utilize money managers, investment funds, brokerage services, or other service providers from whom you receive fees?

Zero.

SEC and DOL Questions (cont’d)

Page 51

Appendix

Page 52

Key Services

Supports consulting teams and client staff, providing specialized expertise on operational developments and best practices in the investment industry.

Kristina RichterInvestment Operations Analyst

Lindsey LongwellInvestment Operations Associate Consultant

Stephen BudinskyInvestment Operations Associate Consultant

Jonathan KowolikHead of IOSG, Senior Consultant, Principal

Investment Operations Solutions Group (IOSG)

Custodian/Third-Party Provider

Search EvaluationDue DiligenceCost Analysis

Transition Management

Searches/RFPsEvaluation

Due DiligenceSLAs

Pricing

Program ReviewSearches/RFPs

Monitoring & Risk Analysis

Securities Lending Other

Trade Cost Analysis Vendor Searches

Commission Recapture / Directed Brokerage Analysis

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Provides operational project leadership, templates, research, and best practice advice on key vendor relationships.

Examples include:• Custody / DC Recordkeeping

– Assessment and Problem Resolution– Bank / Related Service Searches − RFP or short form search

• Securities Lending – Monitoring / Recommendations– Searches − RFP or short form search

• Transition Management – Bench Creation − RFP or short form search– Bid Solicitation

• Other– Trade Cost Analysis Vendor Searches– Commission Recapture/Directed Brokerage Analysis– Ancillary Support for Investment Manager Research on ODD and Cash/Short-Term

Instruments

IOSG: Support for RVK Clients & Consultants

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IOSG: Ongoing AssistanceIn addition to leading vendor search processes, RVK’s IOSG provides support to the firm’s clients and consulting teams:

• Example 1 – Issue Resolution: An RVK client service team or client experiences an issue with recordkeeper operations and reaches out to the IOSG. IOSG maintains separate contacts with the recordkeeper and provides a point of escalation to facilitate a solution.

• Example 2 – Vendor Updates and Commentary: IOSG receives information from a custodian bank regarding a major operational change. The team reviews the change, discusses the details with the custodian, and develops a recommendation that is promptly communicated to relevant consulting teams and clients. IOSG then assists in follow-up discussions with clients and the custodian as warranted.

• Example 3 – Process Enhancement: IOSG assists a client and their selected vendor with the development of a custom online enrollment flow for participant registration. IOSG reviews the enrollment process with the client and suggests changes based on their understanding of the client’s needs and experience with other clients, identifies areas of efficiencies, and assists with user acceptance testing prior to the new enrollment process going live.

• Example 4 – Operational Review: IOSG assists a client in developing a Service Level Agreement (SLA) for their existing custodial relationship. The team reviews draft documents and provides suggested changes based on knowledge of custodial operational best practices and the client’s current needs.

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Leading Third-Party Systems

Five Team LeadersSenior Investment Analysts

18 Investment Analysts 7 Support Staff

Amy EversonDepartment Manager

Bloomberg eVestment FinAnalytica

HFN Insignis Morningstar

MPI Stylus PARis Preqin

Performance Measurement Team (PMA)ObjectiveRVK provides a robust, customizable reporting package inclusive of all information necessary to enable the Board to evaluate the success of achieving goals and objectives, the effectiveness of the investment strategy, and the performance of investment managers.

Reporting Infrastructure:• 23 Investment Analysts

• Leading Third-Party Reporting Systems (Investment Metrics’ PARis & RVK’s AltInvest)

• Access to critical support systems (e.g., Morningstar, Bloomberg, eVestment, Insignis, MPI Stylus)

Key Operational Metrics:• Nearly 200 clients and over 400 plans receive

ongoing quarterly reports.

• Multi-tiered quality control (e.g., self-review, peer review, multiple consultants).

• Extensive experience with public pension plans

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PMA: BenchmarkingPhilosophyThe cornerstone of our benchmarking approach is our belief that performance monitoring is constantly evolving.

• Rather than using default benchmarks recommended by managers, we independently explore quantitative (R-squared, for example, is a common and useful metric we use in benchmark analysis) and qualitative metrics to determine the most suitable benchmarks for a client's managers. Occasionally, we find that the manager-recommended benchmark is not the most insightful; therefore, the key questions we ask when selecting a benchmark are:

– What benchmark best reflects the current, historical, and prospective strategy employed by the manager?

– When designing a customized benchmark/policy portfolio for an individual client, what is the appropriate subset of benchmarks and relative weighting?

– What is a manager's long-term, targeted style tilt?

• In addition to traditional benchmarks, RVK often creates custom benchmarks that combine multiple traditional indices based on a predetermined allocation, actual allocation, or a combination of the two. These hybrid indices can be created in both a dynamic and static fashion, and are described below:

– Dynamic – Uses the weights of either an asset class or individual investment at the beginning of each month and applies it to the corresponding primary benchmark return.

– Static – Assigns predetermined weights to corresponding indices. These weights and indices follow a set target allocation.

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PMA: Ongoing Investment Monitoring & AnalysisRVK’s best-in-class investment monitoring and reporting process is perpetual, punctual, thorough, and covers all aspects of the investment process.

• Key components that are reported on and measured in our performance reports include: – Executive Summary– Capital Markets Review– Investment Policy Review – Asset Allocating Review– Total Fund, Asset Class, and Manager performance versus both relevant benchmarks and peer groups– Total Fund, Asset Class, and Manager attribution, characteristics, and a series of returns-based statistics– Watch list review of investment managers against the performance objectives of the investment policy

statement– Organization updates by investment firm and strategy– Investment expense analysis and summary fee report

• RVK spends a considerable amount of time and resources on the ongoing analysis and monitoring of our clients’ fixed income portfolios.

• Generally speaking, alpha (and associated risk) will be driven by any of the components outlined to the right in a client portfolio (based on certain guideline allowances).

• Thus, we seek to evaluate these components both holistically and individually to first ascertain fit with a given client’s long-term objectives and risk tolerance, and second, to confirm ongoing compliance with stated manager objectives and guidelines.

Duration & Curve Positioning

Region & Country Allocation

Sector Allocation

Security Selection

Currency Management

Fixed Income

Page 58

Disclaimer of Warranties and Limitation of Liability - This document was prepared by RVK, Inc. (RVK) and may include information and data from some or all of the following sources: client staff; custodian banks; investment managers; specialty investment consultants; actuaries; plan administrators/record-keepers; index providers; as well as other third-party sources as directed by the client or as we believe necessary or appropriate. RVK has taken reasonable care to ensure the accuracy of the information or data, but makes no warranties and disclaims responsibility for the accuracy or completeness of information or data provided or methodologies employed by any external source. This document is provided for the client’s internal use only and does not constitute a recommendation by RVK or an offer of, or a solicitation for, any particular security and it is not intended to convey any guarantees as to the future performance of the investment products, asset classes, or capital markets.March 18, 2020