all right. will everyone please rise and join us for the pledge of allegiance. i pledge allegiance to the flag of the united states of america. and to the republic for which it stands, one nation under god, indivisible with liberty and justice for all. mr. secretary, roll call,

please. [roll call] great, thank you. next item, please. i make a motion that we continue to keep brian as the board president. i second. there's a motion, there's a second. any discussion? offer public comment. any members of the public that would like to address the commission regarding this item? seeing none, we'll close public comment. all those in favor? opposed? great, thank you. next item, please.

election of vice board president. great, is there a motion on the floor? there's a motion and there's a second. why don't we call for public comment. any members of the public that would like to address this issue. seeing none, we'll close public comment. any discussion? great. all those in favor? any opposed? great, congratulations. congratulations. [laughter] we'll be going into closed session. we'll call for a public comment before we do so. any members of the public that would like to address the commission regarding going into closed session? great, seeing none, we'll close we are coming out of closed

session. is sfgovtv ready. coming out of closed session, is there a motion not to disclose? great. all those in favor? great. item passes. mr. secretary, next item, please. item six, general public comment. are there any members of the public that would like to address the commission under general public comment for those items that are not agendized? today i'm gonna speak on an election issue. there's a new mayor conceded at 1:00 a.m., congratulations. congratulations to you two for being reelected.

the two commissioners who were appointed this year were very strong supporters of the new mayor. commissioner bridges was going to city hall every day. i just want to say that this is a political board. there are political appointments and political elections to the members. that's the way it is. i don't think that the mayor, the interim mayor appointed the best possible appointments. and that doesn't mean me. there are a huge number of highly qualified professionals. i think the members deserve a lot better than that. it was an extremely opaque process. i tried to participate in it. i was completely shut out. i never even got anything. never talked to anybody. i think commissioner chu is gonna grow into her role. i don't think either one of these two commissioners have

the investment expertise that's widely available. i think commissioner chu is going to grow into her role based on her past service. i think commissioner bridges has some prior experience at blackrock. that's a great connection. 30 seconds. she's shown a lot of interest in investment issues based upon the huge number of travel requests she makes. i hope that she speaks a lot more frequently in board meetings in the future, thank you. thank you. any other members of the public that would like to address the commission under general public comment? seeing none, i'll close general public comment. mr. secretary, next item. action item approving the minutes of the april 11th, 2018 retirement board meeting. why don't we start off by calling for public comment. any members of the public that would like to address the commission regarding the minutes from april? seeing none, we'll close public comment. is there any discussion among the board regarding the

minutes? from the april meeting? yes, from the april meeting. i know staff spent a great deal of time editing and re-editing and re-editing the minutes to reflect accurately what was said. the subject matter that was addressed will come up again. thank you. thank you, commissioner. is there a motion on the floor to accept the minutes? i'll move it. there's a motion from commissioner chu. a second from commissioner jordan. can we take the item without objection? item passes, thank you all. mr. secretary, next item? any members of the public that would like to address the commissioner regarding the minutes? seeing none, we'll close public comment. any discussion amongst the board or any questions?

there is a motion, is there a second? second. can we take this item without objection? great, item passes. thank you. next item, please. item nine, the consent calendar. why don't we open it up for public comments. any members of the public that would like to address the commission regarding the consent calendar? mr. furlan

i would suggest that in the future, travel requests be voted on. and that members who make the travel requests can't approve their own travel requests. that they be discussed and voted on separately. this is not a private travel agency. . thank you, mr. furlan. the consent calendar. any other members of the public that would like to address the commission? seeing none, we'll close public comment. any other discussion regarding the consent calendar? seeing none, is there a motion on the floor? i'll move it. there is a motion, do we have a second? second. motion and a second. can we take that in without objection? item passes, thank you very much. next item, please.

good afternoon again, commissioners. our private equity program has enjoyed tremendous performance since its inception over a period that spans three decades now. the board and the beneficiaries and the taxpayers of the city should be quite proud of that. we have tried over the last five years to position the portfolio so that it continues to deliver superior risk adjusted returns for the coming

decades. and cambridge is here to give you guys a bit of a picture of what we've done and what the portfolio looks like today. this will be referencing our materials. i'm anita ing and i'm referencing the private equity overview update materials from cambridge. if i can just direct you to page one. we have been working with san francisco employee retirement system for close to five years since 2014. today, our team dedicated to san francisco across private equity is 23 strong. and that is across our five offices. and that 23 number is further supported by our resources in

our 11 offices. i wanted today to give an overview of the year for 2017 on the private equity program. today, the private equity program stands at 16% of total plan assets. and that's been building gradually. last year, that was 14%. five years ago, that number was 11%. and so we continue to build towards our 18% target allocation for the program. just as a reminder, that 18% target was approved in 2015. the build up this past year is particularly notable.

the overall value to last year through the year of 2017 grew from just shy of $21 billion to over $24 billion. and we've also had very strong, steady levels of distribution in the past several years reaching a record year in 2017. in terms of the number of commitments we made in 2017, very productive year. $994 million committed to 15 managers. ten of those were existing and we made five new commitments to new relationships. those new relationships were either upgrades or added additional complimentary and additive exposure to the program. all of these managers were constrained. in terms of the fundraising market, it still remains very competitive out there for lp's. the team has done a fantastic

job developing these relationships. along with us, developing these relationships early on and being able to get access to those new managers, even the existing managers they've been able to upsize. we're picking our spots within the market itself. we continue to really look at bottom's up analysis in prioritizing pockets of value. and so in recent years, we've intentionally focused on increasing exposure to asia, to gross capital as well as sector focused and mid cap funds where we see the opportunity as more attractive and less efficient higher growth and better downside production. i'll flip pretty quickly maybe

to page three on the program performance. and you have enjoyed a very nice premium over those indi s indices. and we should have included here and we will for our next review, the new benchmark as of october 2017.

just wanted to point out that, again, the system has ranked in the top ten of public pension returns as ranked by the american investment council. and number eight in the latest ranking. on page four, just a quick snapshot of the annualized returns for the program for the 1351020 year. you'll see here on the blue bars, that's the total plan assets and the annualized return for the total plan. that's inclusive of your private equity program. the orange is the private equity program return. you can see that in every multiyear period starting from year 3, the private equity program has added significant value to the total plan. in the one year period, the

public portion of the portfolio has done incredibly well and generated a 17% return overall for the planned assets. the short term results are less meaningful and we had a very strong year for publics then. in the short term, that is usually smoothed out over time. so i'd focus more on the longer term returns. turning to page five with the exposures for the program, you'll see here what we have for the exposures. the exposures show a good balance across the sub sectors.

venture, growth, buy out. and then the remainder for special situations, opportunitistic. the left hand side is what's in the ground today in terms of the net asset value. on the right hand side, we have the exposure by nav, plus unfunded.

we like the risk of return profile within gross capital as well ch well. the industry exposure for the program, you can see that it's compared with our global benchmark. we like the nature of the sector, but it also does not show th-- the tech sectors ar very diversified.

spans across many different industries. in this part you can see there's more of a focus on asia. we have been slower in finding ideas and opportunities. we'll move to page 11, which also shows where the commitments have been in the last five years. the top is by sub strategy and the bottom is by geography.

we're emphasizing asia, emphasizing gross capital. may i ask a question. you're saying this is the current nav for all those funds we've committed to over the last five years? this is the commitment break down over the last five years. okay, all right. so if we put money into a fund five years and one day ago, it's not on here? correct. thank you. the next two pages, we re-ran our pacing analysis and are comfortable with the pacing for the program in recent years and we continue to recommend a $900 million to $1 billion pace for the program.

is this based on the portfolio company's location? for san francisco's portfolio, that is based on the company, where the companies are. thank you for putting so much detail in this. thanks for trying to illustrate

the committee capital. thank you. questions or comments from the board? why don't we open it up to public comment. any members of the public that would like to address the commission? mr. furlan. good presentation, but it should be focusing more on the risks involved. cambridge associates and the subsequent things that the u.s. private equity overvalue d it' extremely overvalued right now.

what you have to do is figure out the risks, the projections on page 13. there's no bear market in there. there's gonna be a bear market some time in thefection five years. the emphasis on tech is good, but tech is highly overvalued. their free cash flow has increased 10% annually over the last five years. their market cap has increased 30%. that's what's driving us. everybody wants a school or somebody to buy them. that's what's driving venture capital. everything is really, really overvalued right now. i'm just gonna make one comment

for this and it's gonna pertain to all of the presentations and i won't bother you with them all. these presentations at this stage of the cycle should be focusing more on risk mitigation in their respective sectors. that's it. thank you. thanks, mr. furlan. this is a discussion item only for the board. any other comments or questions to write in the report? just as a reminder to us, what would be helpful is good job showing the five year commitment. it would be great as a refresher to see what the one year commitments look like, geographic, where the sector focuses. sure. thank you very much. i guess we'll move to the next item. just as a matter of protocol, give everyone a head's up, i am gonna call a couple items out of order here. not right now, but shortly i'll be calling item 16 and then

item 24 because not all board members will be able to stay past 5:00. mr. secretary, why don't we do that after the next item. item 11, discussion item, real assets portfolio update. very good. board members, the real aspects have been great the last number of years. relative on the private equity portfolio who's history has been excellent, we feel like it will be very challenging for us to meet or beat historical levels of performance. real assets, however, we feel very good about our chances of beating our historical

performances. as a reminder to the board, we did earn about 8%. with the broadening of our private real assets portfolio to include strategies such as private natural resources, we feel very confident we are achieving and will continue to achieve returns well north of that for the long term. good afternoon, commissioner. i'm with cambridge associates and work exclusively with the real assets team here. i'd like to take a few minutes to walk through the presentation that we put together for you. please feel free to stop with any questions. i'll point you to page three of your presentation. it provides an overview of the update. the portfolio's current real assets exposure stands at just

under 14% relative to our target of 17% which represents growth relative to our exposure just three years ago. 2017 was a productive year. we committed just under $800 million to 15 funds. above all, i would just like to highlight that despite the very meaningful growth in the portfolio as well as fierce competition in the markets, the program is obviously performing very, very well. and it's due to the great efforts of the staff who are continuing to identify market dislocations and best in class operators to partner with. on page four, we provide an illustration of the portfolio's program. since inception, we've committed $10 billion to 121 managers of which $9.3 billion has been called. since that time, the program has created over $3 billion in value. page five in your presentation highlights the total program's investment performance.

as you'll see over the last 20 years, the program has outperformed a blended benchmark by 80 basis points. that's in light of a much more conservative program. page six provides additional granularity. the underperformance on a relative basis that you see in the past five years reflects the early stage of the curve due to recent commitments to private equity funds within those sectors. we expect performance to ramp up on the natural resources side in the next couple of years as those commitments begin to harvest. the nav exposure reflects

invested dollars. the exposure on the right includes unfunded commitments. it provides some insight into the direction of the portfolio. the portfolio is well diversified from a product time standpoint. from a strategic standpoint, the portfolio is still heavily weighted towards core. we expect the future weighting to shift more towards value add and opportunistic strategies. we expect some additional added exposure in the international side in the coming years. on page nine, this illustrates the portfolio's natural resource exposure. similarly, the portfolio's well diversified from a resource and value chain standpoint. geographically, the portfolio is also concentrated in -- on

pages 10 and 11, we provide portfolio observations. as mentioned in 2017, we committed just under $800 million towards 15 managers. and our average commitment was over $50 million. this reflects the strategic focus to making high conviction bets with best in class managers. cash flow turned slightly negative in the past two years. that reflects a shift towards higher returning private equity strategies. although bear in mind that from a liquidity standpoint, our requirements are certainly manageable due to a large core and n hshlp position.

as mentioned, we expect those to ramp up in the coming years. i might also add that the recovery and commodity prices will add some tail winds as well ch well. page 12 illustrates the portfolio's exposure from a five year commitment standpoint but this slide adds commitments over the last five years it shows the exposures. from a geographic standpoint, the portfolio's building exposure outside of the u.s., particularly in asia. page 13 illustrates portfolio cash flows. cash flows were slightly

negative over the last two years, although we're absolutely fine from a liquidity standpoint. on our final slide, page 14, it illustrates the program's projected commitment pace based on our exposure model. bear in mind, this is an exercise that is just a model. basically what we do is take into account our legacy investment ands the cash flow profile from those legacy investments. and it helps us make a projection and some assumptions based on total growth of what the appropriate level of commitment pacing should be in order to hit our 17% allegation target. so that concludes my formal comments on the program. i'd like to reenforce the point that initially made that the program is performing very well due to the strong investment te team. the private landscape is extremely competitive.

with that, i'm happy to open up to any questions you might have. questions from the board? comments? i do appreciate the charts that show the nav as well as the unfunded amounts. i'm always curious to know how much of that leads us to the asset allocations. i know that page 14 gets us there. that's a good question and it goes hand in hand with the cash flow slides as well. just want everyone to understand that when we have positive cash flow, that means there's more cash coming back to us from our portfolio than we're putting in, right? that was the case for quite some time. but that makes it very difficult for us to grow towards our target allegations. particularly when the rest of the plan is being supported by

very favorable growth in the public markets. in the recent couple of calendar years, we've gotten to a cash flow negative standpoint. sounds negative, but it's actually a positive for us. now we're finally putting in more capital than we're getting back from our portfolio. therefore, our portfolio can grow by those invested dollars and the organic growth of nav in those portfolios. and we can finally grow towards our target allocation. so in fact, we've been outpacing the public market side of the portfolio. not easy when the public markets are super charged as they have been over the last couple of years. so we're getting closer. not quite there yet, but closer to our 18% target allocation for pe. 17% target allocation for real assets. i think the numbers are 16 and 14 now versus probably single digits or low double digits when i started. and so to be able to do that

and improve the returned profile of these portfolios is no small feat. and it's a credit both to the team but also to the board for understanding why we need to be so aggressive with our capital commitment pacing. other questions from the board? i do have a question. on page 16, i guess would be the index of the cambridge report or the appendix, excuse me. the second chart, we're seeing a little bit of a fall off. just from a market perspective, how predictive is that? it's a great question. one qualifying point that i might make is that it does encompass all of the product types.

in their first bullet point, we highlight that a lot of that has to do with the sector that's a bit more bond like relative to other product types. but i think it's absolutely worth payi ining attention to. a counter argument might be that we're not yet seeing some of the stimulus that has been introduced to the economy through recent legislation. i do think it's fair to say that growth could continue to be strong. the strategies that we're migrating towards are those strategies where the managers are creating value at the asset level and they're focused on net operating income growth.

that's how the value is being created. what's happening there? it's a number of different factors. in some cases, it could be oversupply. in some marks, we're starting to see signs of oversupply. in that instance, it could be that rents are starting to come down. and you're right, real estate is some what commoditized. you might see rental rates and market rates come down. and that's gonna squeeze noi.

today, you saw on the news how -- if you really saw the rates go up as high as some people were talking about, that's gonna be really bad for real estate projects starting up today. so explain that to the board what will happen. even just thinking about that in san francisco, we have a lot of projects that are just breaking ground. and they've done that with rates so low. what happens when rates go up. let's say they go up to 6%. yeah, i think it's a fair point. actually, i would tie it to the question that you just had about noi. if you look at it purely from a data standpoint, there actually isn't necessarily a very high correlation between interest rates and cap rates. i understand intuitively that you'd be concerned with that. if you look back historically

at periods where we have had inflation, it was typically outpaced by larger groups during those periods. they ended up being strong performance periods from a real estate standpoint. is that a difference between interest rates and inflation? i understand inflation, that's good. they're gonna build it in, they'll increase rents. but what happens when their borrowing rating go up and they have to reservice that. they started at three, now they're at six or whatever that is. i think that's a great poi point. but if you look at where interest rates are, it's still relatively low. and so overall, we typically, when you're entering an asset from an acquisition standpoint, you're typically looking for, ideally, a 200 basis point spread above your cost of

capital. and so i think assets are still very, very expensive. but again, it reenforces the need to find managers that are going to find those pockets of value. and it could be a type of produ product. you know, we get together before these meetings and one example of ways that we can work against that potential cap rate expansion is by identifying real estate product types that have very strong demand drivers. senior housing, student housing, self storage. medical office. product types that are resilient because the demand for them is so, so strong. those are examples of strategies that we might pursue. but otherwise, your point about rising interest rating, i do

think that from a relative standpoint, they're still relatively low. yeah, and we focus on managers who have moderate reliance on financial engineering. generally, we prefer levels around 50-60%. the recent manager who is an exception to that is blackstone. in fact, i think ltb levels are probably lower than what they were in our core legacy portfolio. beyond that, we have been less aggressive in adding to our real estate portfolio relative to our private natural resources portfolio. and it was our intention to commit to about 50% real estate and 50% natural resources. we didn't quite get there because the market moved on us. the commodity prices didn't stay low for as long as we would like.

but for those three years, we were backing up the truck, absolutely. and should be positioning those commitments for returns in excess of 15%. and certainly on paper they're looking like that. the market rebounded a bit quicker. we didn't quite get to the 50/50 allegation that we were roughly targeting. but there's ways that we can mitigate some of the end of cycle issues that real estate will be facing. when i listen to this, i think that we really have to commend staff for putting a lot of this in front of us. i remember it came to a new board eight years ago when people were uncomfortable with $25 million. and that put a constraint on staff because it wasn't moving the needle by doing $25, $25, $25. they couldn't get those allocations up. the results are, i think they're really, really

commendable. so far, so good. i work exclusively with pension funds and i can assure you this is one of the most talented teams that we work with. why don't we pause -- i'm sorry. i'll just add that i do appreciate relying on the cap rate impression and moving towards a value add approach. that makes a lot of sense in terms of what we're seeing. i think in particular with all of the documents we're seeing from cambridge about the overvaluing of real estate or property in the u.s. and so on, i'm just curious to hear. for a long time, we think about what's gonna happen in the san francisco real estate market. and we've been seeing a lot of activity over the last few years. not only transactions, but a lot of investments and other things. do we expect that to slow down? if we're seeing this, everyone is seeing this in terms of the overvaluing of property, etc. how do you see it?

i think the market is cyclical. san francisco's real estate market may be more cyclical than most given its reliance on tech and the exposure there. a lot of it is driven by the tech companies. how much of it do you think is related to foreign investment? being on pacific rim, there's definitely value in both commercial and residential real estate.

that had continue to be a driver for the west coast and for certainly the bay area. when someone is up against you, they'll pay more. the interest rates affects whether projects get built or not. however, it also affects the supply and demand. the value of our properties does go up. since that is one of the reasons why staff recommended we do more investment in real estate in europe as well as asia. that's correct. the other part of the coin though is countries can only control their interest rate or their currencies or both. one reason why i keep asking questions about how we are taking currency into our

equation. i do appreciate the investments that have been recommended for europe. i don't know if asia is sustainable with the high costs. there's more of an acceptance that it is a global asset class. there's plenty of capital in europe, plenty of capital in asia. but we feel like those markets are a little bit less efficient. and there's pockets of opportunity. they're taking advantage of

some of the distress portfolios of financial institutions there, which we're finally beginning to let go of some of those assets. of course, blackstone is everywhere in the world doing what they do. i think what we're trying to do is look globally. there's no geographic top down allocation that we must be in these markets. not only are these markets efficient, some of them, like asia, have -- they need places to work, live and play. that long term trend and urbanization trend in those markets are not subsiding. and that will take care of the demand side of the equation. we're relying on the expertise of our managers to make sure they don't get ahead of themselves and that they roll up their sleeves, add value to these properties and drive noi. in those markets, noi will continue to grow.

why don't we go to public comment. any members of the public that would like to address the commission regarding this particular ie item. this is the type of discussion that i think you should have. it was very good. kicked off by wendy's question and commissioner chu's questions. focusing on the downside. that's what you should be thinking about. it says on page 16, rising interest rates will likely result in expansion. but the issue is what you're gonna do it about it. i don't envy any of these people because they have certainly difficult jobs right now. i think the overall issue is that the portfolio as a whole, they have to do what they have to do. they have to hit their targets. they have to do the best they can. everything is overvalued. the biggest problem in china besides the banking system is nobody in china believes real

estate can go down. if it were to ever go down, there would be a panic. i hate to see what would happen. so far, the deleveraging in china is being done very slowly. but it was a great discussion. the only problem that i have with it is it took a little questioning to get it out in that direction. all of these discussions from now on should be focused on risk mitigation and highly overvalued markets. that's your problem. thank you, mr. furlan. good afternoon, commissioners. i'd like to bring it a little more locally and ask, what is our investment. how much is our investment in

san francisco real estate. and again, my traditional question about us as a retirement system buying or building an administration office or the type of building in this civic center area that can actually house all of the government offices here and if there's any progress on that. i think that would be a great real estate investment and one that wouldn't go down any time soon. thank you. thank you. any other members of the comment that would like to address the board on this item? seeing none, i'll close public comment. i just have a request. can we just work out an in-depth analysis without putting too much time. can we just try to understand what is going on with the net operating income? just generally. what is the driver? anecdotally, it looks like it's

related to other trends. we can decompose it and follow up and provide that color. absolutely, that'd be great. thank you very much. okay, great. why don't we move on to our next item. mr. secretary, i would like to call item 24. item no. 24. he doesn't seem to be persuaded to stay any longer than the end of this month. over 32 years of service to the city, including nearly 19 years for the retirement plan. he has been the board secretary. we're trying to figure out exactly when that became official. our best estimate was seven years ago. he's served as board secretary

as well as my executive assistant. we would propose that the board approve this resolution. certainly, he is widely known and respected across the city. he has worked in many departments, but he's also counsel to a lot of department heads as well as been invaluable counsel to me and to claire murphy and her role. and so we would urge the board to adopt this resolution. we're having a retirement party for him tomorrow.

i always remind him that we know how to get his attention if he ignores our e-mails. we'll just hold his pension check for a month and that usually gets him to call to find out where the money is. and then we can get answers.

and so i did put the call in before i accepted the position. there are days that i wish he'd told me more. [laughter] but certainly he very fairly represented what i found when i came here. and i certainly appreciate his willingness to come back at a point in time where he could finish his career here. and again, staff is certainly going to miss him. he'll be hard to replace. i'd like to make a motion that we adopt a resolution as written. there's a motion, there's a second. would any of the board like to make any comments or any discussion? commissioner driscoll? yeah, i would like to make a comment to thank norm for being an outstanding example of

a public servant. i don't know how many times a week i'll call norm on some sort of subject. he's always very quick, which i appreciate. but it's how calmly he's always dealt with not just us, but all the issues that fly at the board. its been his insistent and thorough way of working with us and for us that has made him rather invaluable. i would say to whoever his successor is fortunate to become and for everybody here on the whole team, that gentleman has set the standard here. in case you're wondering how hard you should work, check him out. thanks again, norm. i would like to echo those comments and i would just add that the way norm assists the members of the system and the member of the city family and

everybody that needs assistance, he always knows when to point us in the right direction. he knows how to get the questions answered and he always does it so quick ly. thank you, norm. thank you very much. he said, don't worry, i have you covered. we can discuss and review everything. and i can tell you, he's been very supportive and i really appreciate the support and everything you've given me. i have a hectic travel schedule and you've worked through it all, so thank you.

norm, the first time i met you was when i was running for the board. i usually think i can read people pretty well. and i could not get a read on you at all, absolutely just poker face. what i've learned over the years is you're an absolute professional. any time i need something, if i call you, it just gets done. thank you for your service. this job is never easy. i just simply want to say from the city family, thank you very much for your years of service. i hope that you enjoy the next chapter because i hear it's really great. norm has been in a lot of city departments. i, for one, just really

appreciate it. i'm usually calling him to keep myself out of trouble. but just his good common sense. very few people that will take an item and think ahead five steps to what you need to do. and norm would always do that and follow up and get it done. it's just an example for all of us. i think if we all could be as good as you in our careers and our lives, that would be a tribute. great, why don't we open it up to members of the public if anybody would like to address the commission regarding this item. as a member of the public, i would like to thank you. it's one thing to have good relations with members of the board, but the members of the public are very important, too. you've always given me good answers, you've been very confident. you've also shown good judgment.

you're taking two weeks vacation. that's good. i hope my judgments are as good in the stock market as you have been on your job. thank you.

>> why don't we go back to action item number 16 please. >> approval of the guidelines for generation. >> same kind of contest and same subject matter. there's repeat just custom made particular for the manager. but otherwise, always the same as same as every other strategy in terms of