CalSTRS to revamp secondaries policy

The changes will enable the $209bn public pension to participate in restructurings and other complex secondaries transactions.

California State Teachers' Retirement System plans to revamp its secondaries policies to pursue more complex and larger secondaries transactions, according to a draft policy paper to be presented at its latest investment committee meeting on Wednesday.

The investment staff has already been increasing its exposure to secondaries asset purchases through both secondaries fund managers and through co-investments, according to the document.

“Enabling staff to make a greater variety of secondary purchases will help staff reach its long-term allocation target faster with potentially reduced risk compared to committing exclusively to blind pool,” wrote p rivate equity head Margot Wirth and portfolio manager Robert Ross in the document, which is at the first reading stage. A second reading is expected to take place in November.

“The revisions to the private equity investment policy related to secondary market transactions provide staff with tools and boundaries required to successfully execute such deals in today's environment.”

Existing CalSTRS's secondaries GP relationships include Ardian's ASF VII, Coller Capital's Coller International Partners VI and VII and Blackstone's Strategic Partners Fund VII, according to the pension plan's website.

More complex transactions could include fund restructurings, GP-led processes and other complex deal types.

The private equity investment policy has introduced a reference to secondaries transactions potentially involving “diversified (greater than three assets in a single transaction) or non-diversified (less than three assets in a single transaction)” asset pools.

It has also broadened its definition of the asset pools that can be bought or sold, stating that a pool can consist of “limited partnership interests, co-investments, general partner interests, separately managed accounts, portfolio companies, or a combination of the above”.

According to the document, the previous definition was “much more narrowly focused on the purchase and sale of single limited partnership interests”, and did not factor in the number and diversity of assets that can now be bought or sold. With more complex transactions now commonplace, an “update to the asset types is necessary for CalSTRS to stay competitive”, according to marginal notes in the revised policy draft. 

The broadened definitions of what a secondaries transaction can be should give the staff the “tools and boundaries” to carry out more complex deals, the paper says.

The paper also suggests changes to the co-investments, direct investments in general partnerships and separately managed accounts section of CalSTRS private equity investment policy.

Chief among these is higher transaction limits that take into account the fund's growth and “the need to make larger commitments to maintain the private equity approved asset allocation target.”

Under the draft proposal, each co-investment shall not exceed the smallest of $250 million; 10 percent of the size of the LP investing in the transaction; or 100 percent of the limited partner's investment in the transaction. The existing limits, last updated in 2006, stipulate $125 million, 5 percent and 80 percent, respectively.

According to Setter Capital's Volume Report for 2016, pension funds accounted for less than one percent of buyers in the secondaries market in the 2016 fiscal year, with secondaries funds accounting for 83 percent. Pension funds were, however, the most active sellers, accounting for 37.3 percent of transactions.