Lexington acquired stakes in $1bn Texas ERS sale

The deal closed around six months after a board member at the US pension expressed scepticism about selling stakes on the secondaries market.

Lexington Partners picked up stakes in Employees’ Retirement System of Texas‘s (ERS) almost $1 billion private equity portfolio sale around six months after a pension board member expressed scepticism about secondaries sales.

ERS in March agreed to the sale of 14 buyout funds representing $951 million, according to investment plan documents prepared for its 16 August board of trustees meeting. The pension had sold 13 funds worth $858 million as of 30 June, with one remaining fund set to be transferred in January 2017.

UK regulatory filings show the New York-headquartered secondaries firm used its Lexington Private Equity 21 vehicle to acquire ERS’s stakes in at least three funds: Charterhouse Capital Partners IX, Hg Capital 6 and Hg Capital 7. It was not clear if Lexington bought the entire portfolio.

ERS board of trustees member Cydney Donnell said in August last year that ERS had never been able to agree with buyers on attractive pricing for potential secondaries sales, adding that the pension was not willing to take a 20 percent discount in net asset value.

The disposal has temporarily reduced ERS‘s allocation to private equity and proceeds from the sale should be redeployed to other private equity funds to meet the pension’s 10 percent target allocation, the documents show.

“Following the secondary sale, the programme is underweight in buyouts, which constituted the majority of the NAV sold,” ERS noted in the documents. “Current target allocations and investment pacing project the portfolio to be slightly over its target allocation for the next fiscal year for all strategies except buyout.”

The pension’s investment committee proposed allocating up to 30 percent of its private equity programme to special situations, which includes secondaries, in up to three funds representing a maximum $225 million.

Pension funds were the most active sellers in the first half of the year, accounting for over a third of all sales by volume, according to a mid-year report by Setter Capital. This trend is set to continue into the second half, with pensions accounting for 36 percent of sales.

Lexington declined to comment. Charterhouse and Hg Capital did not return a request for comment.