Montana shifts focus to mid-market

Exit environment and value creation concerns have prompted the Montana Board of Investments to refocus its private equity programme toward the lower and mid-market.

The Montana Board of Investments will focus its private equity commitments on smaller cap strategies going forward, citing stronger value creation opportunities and better alignment of interest, according to board documents.

The board’s 4 October meeting minutes, available in its 13 November agenda packet, indicate that private equity investment staff’s private equity strategy will now include a “bias towards smaller market cap buyout and growth strategies since less efficiency here creates opportunity”.

Chief investment officer Cliff Sheets added that mega-cap funds are not as flexible in how they realise investments, while small and mid-caps offer more flexibility on exit strategies, according to the minutes. 

The board will continue to commit to large-cap funds as well, but will narrow its strategy to target investments with its key relationships and best managers. 

Montana’s investment staff has not responded to repeated requests for comment. 

Mid-market and small market private equity funds have become increasingly popular among limited partners in recent years, particularly as some recession-era mega-buyout vehicles struggle to generate returns. 

In August, the State of Wisconsin Investment Board sold $1 billion in mega-buyout commitments, a sale that was motivated at least in part by the decision to move away from larger private equity funds. A StepStone Group report on the sale cited the belief that some mega-buyout firms are no longer properly aligned with their limited partners now that they are publicly traded companies. 

In addition to retooling its strategy to focus on small or mid-market strategies, Montana’s investment staff also reiterated its decision to move away from fund of funds strategies, as “a direct strategy should outperform due to a reduced fee burden”, according to the 4 October presentation. 

Montana also revealed four new private equity commitments in its November meeting documents, investing $75 million across four funds. Sterling Partners and NB Strategic Co-Investment Partners each received $20 million for their latest vehicles. The Board committed $25 million to Audax Private Equity Fund IV, and added $10 million to its existing commitment to Dover Street’s eighth vehicle. 

The Montana Board of Investments has been an active investor in private equity for 20 years. The board’s private equity programme was valued at $1.03 billion as of 9 November, good for approximately 7.2 percent of its $14.2 billion investment portfolio.