New Jersey paves way for secondaries sales

The US pension may, if the price is right, sell up to $1bn-worth of private equity holdings on the secondaries market.

New Jersey State Investment Council, which oversees the state’s $72 billion pension system, has approved procedures for the pension to sell private equity stakes on the secondaries market.

The pension may look to sell up to $1 billion of limited partner stakes in private equity funds, two sources told PEI in an earlier interviews. New Jersey could identify 15 to 20 funds in which it has stakes to sell, Tim Walsh, chief investment officer at the pension, said at the investment council meeting earlier this month.

Prices in these investments have come up to levels where it's time to either take profits or move on.

Tim Walsh

The pension had to put the procedures in place before it could initiate a sale of its private equity holdings, Walsh told the council. The pension is not a “distressed seller” like certain institutions that have needed to sell private equity stakes to generate liquidity, Walsh said. Instead, the pension will be “opportunistic”, he said.

“Prices in these investments have come up to levels where it’s time to either take profits or move on,” Walsh said. 

Portfolio management

As part of a rebalancing, the pension is also considering raising the caps on alternative investments from 28 percent to 38 percent. At the meeting, council preliminarily approved raising the caps, sending the proposal into a public comment period, which will conclude in May.

New Jersey had taken a hiatus from making commitments to private equity funds for more than two years as it battled an over-weighted exposure to the asset class. Late last year, the pension made its first commitment to a pure private equity manager — Cerberus Capital Management spin-out Tenex Capital Management. The pension made a $50 million commitment to Tenex's debut fund and in exchange got the incentive payment the manager collects on the fund's profits knocked down to 16 percent from the traditional 20 percent.

The pension would like to use the secondaries market to cull some of the managers from its $4.6 billion portfolio who it is not likely to re-up with again.

Walsh would not identify specific fund stakes the pension was considering selling, but said the sales should not be construed as punitive to the managers who get sold. The sales would mostly be about “rebalancing the portfolio”, Walsh said.

The pension system also is re-bidding contracts for advisors in its alternative asset classes, including private equity, real estate and hedge funds. Currently, the pension works with Strategic Investment Solutions in private equity, Townsend Group in real estate and Cliffwater in hedge funds.

Rules of the game

The secondaries sales procedures were put together by one of the pension’s alternative investment analysts, Jason MacDonald, who said prices in the secondaries market have risen in part because of the “[billions] raised over the last few years to buy secondary interests”.

Certain criteria will go into the pension’s decision to sell holdings in a private equity fund, including performance, the expected return and the likelihood of re-upping with the manager, MacDonald said.

New Jersey is considering hiring a broker for the secondaries sale, sources have told PEI in past interviews. A Wall Street Journal article recently named Cogent Partners, UBS and Park Hill Group as candidates to run the sale, though that could not be verified with the pension.

Pricing for assets on the secondaries market are trading at low discounts or even at par – and in some cases, slightly above par – a big turnaround from the deep discounts being offered by buyers in 2009 and some of last year.

The attractive pricing has brought sellers to the market this year. Already, several US public pensions have considered using the secondaries market to rebalance their portfolio ahead of a glut of re-ups that are coming. Indeed, the California Public Employees’ Retirement System is selling a chunk of its portfolio and North Carolina’s state pension is considering coming to market with some of its private equity holdings.