Just five years into restructuring its private equity portfolio, the $160 billion Florida State Board of Administration has transformed into a limited partner predominantly focused on specialist managers and smaller buyout funds. Now it is expanding its focus into distressed strategies and building its Asia exposure, says senior investment officer for private equity John Bradley.
Buyout funds account for more than 60 percent of Florida’s $11 billion private equity portfolio, which includes growth, distressed, venture and secondaries strategies. The decision to restructure the portfolio to focus on smaller buyouts and specialist funds was taken in 2014.
The buyout funds portfolio composition is a reversal from June 2011: seven large and 17 small buyout funds, compared with 16 large and seven small. Seventy percent of Florida SBA’s buyout commitments are now to specialist funds.
“Our view is that smaller managers offer greater outperformance or potential and therefore greater upside,” Bradley says, adding specialist strategies help achieve portfolio diversification. Its limited partners advisory committee seat on these funds, where Florida is often the largest LP, “helps us shape the terms of the fund’s portfolio”.
Florida SBA commits around $2 billion to private equity each year. When selecting a manager, its fit into the overall portfolio is critical.
“We compare the manager to other funds in our portfolio and other funds in the market, and ask, ‘Are we getting duplicative exposure in our portfolio or is it a complementary exposure?’,” Bradley says. Florida is underweight on distressed exposure (9 percent against a 15 percent target allocation), but is expecting to be back up to target through new and increased commitments within two or three years.
“We let our distressed exposure run off a bit, but are looking to ramp it up because we do anticipate a market correction/dislocation in the next few years, and we can capitalise on that,” Bradley says.
Florida is also actively building its Asia exposure, primarily in China, across almost all strategies, he adds.
Increasing fund sizes and the speed with which GPs are coming back to market pose challenges for the pension system.
“We try to plan who is coming back to market in the next three to five years and prioritise and arrange our investments; when that three- to four-year calendar gets compressed to two to three years, it becomes challenging,” Bradley says.
On occasion, the pension system has not been able to secure its preferred allocation to a manager; and on some occasions, if the manager’s strategy changes because of a larger fund size, “we wish them well and don’t re-up”.