Chief Investment Officer’s Seventh Annual List of the World’s Most Influential Investment Consultants
By Anne Field
As a partner at StepStone Group and head of US mid-market research for the past five years, Michael Elio straddles two worlds: client service and portfolio management for the firm’s institutional accounts. That’s because StepStone’s approach is to eschew the usual layer of intermediaries. Instead, Elio and his colleagues work directly with clients. “We find that to be a more efficient way to deliver our services,” says Elio.
It’s all in the service of creating bespoke portfolios for clients, who include such heavy-hitters as the Pennsylvania State Employees’ Retirement System and the United Nations Joint Pension Fund. That entails doing due diligence on about 175 funds annually, with each client’s unique needs in mind, from allocation considerations to size of the investment. And it means that, across the entire research platform, everyone interacts with clients. “It forces us to put ourselves in the investor’s shoes,” he says. “We can better understand where a potential investment can fit in a client’s portfolio.”
StepStone offers two sides to its services. On one, it advises clients on building private market portfolios, not only introducing them to managers of private equity companies they’ve vetted but also helping choose the right funds for their portfolio’s construction. The other side is asset management, through which the firm finds investments on the secondary market and co-investment opportunities.
It’s also an approach, Elio is quick to point out, that wouldn’t be possible for a firm with a larger base of accounts. StepStone, which oversees more than $255 billion of private capital allocations, serves about 100 clients.
These days, even with bigger clients, Elio tends to work with CIOs, instead of just the heads of different asset class teams. That’s thanks to the increased blurring of the line between asset classes, making portfolio construction considerably more complex than the process of bucket-filling it used to be. “The head of each asset class works together and CIOs have to orchestrate those relationships,” he says.
Elio’s background makes him well-suited for his hybrid role. As head of a private equity consulting group at State Street Bank from 2004 to 2006, he dealt with an A-list of clients, from the California Public Employees’ Retirement System (CalPERS) to the California State Teachers’ Retirement System (CalSTRS). Then, along with three colleagues, he spun out the business and formed LP Capital Advisors, where he served as the lead consultant to North American and European institutional investors for six years. That included many of the firm’s largest clients—public and private pension plans committing in excess of $5 billion annually. After selling the firm to Pavilion, he joined the Institutional Limited Partners Association (ILPA) as managing partner, where he led ILPA’s programs around research, standard-setting, and industry strategic priorities.
For Elio, it’s the CIO’s dual jobs as investor and administrator that makes the job particularly tricky these days. Certainly on the private equity side, with a significant increase in the number of newcomers, he feels that selection of managers of private equity companies has become an especially critical issue. That means not repeating the mistakes of the years before the crash by, say, lowering the bar on their requirements or over-committing in an effort to deploy their capital. At the same time, as administrators, they frequently face a governance process that slows down their ability to make quick decisions when necessary.
Lately, clients also have been demanding a deeper look at what’s happening in their portfolios. “CIOs want to be investors and to do that they have to get closer to the assets and to controlling where their dollars are deployed in private markets,” says Elio. “They want to choose not just managers, but the funds themselves.” For example, recently, one client team was looking for more exposure in Asia, but only in certain regions. With that in mind, Elio worked with them to create an account targeting specific managers and co-investments alongside those managers focused on the preferred areas in Asia.
Another specialty for StepStone is helping new or re-entrants into the asset class while avoiding the negative j-curve impact. For example, a client recently wanted to dramatically increase its exposure at a very expensive period of the market cycle, and, within three years, through the use of select private credit and seasoned fund investments, co-investments and secondaries, the client has achieved its 12% exposure with no negative impact to returns normally associated with a developing private market portfolio.
Elio relishes the opportunity to work with CIOs directly, helping with the intricacies of forming and managing unique portfolios. “It makes it exciting. You’re not doing the same thing for everybody,” he says. “That can get boring.”