The secondaries market roared back to life last year, led by a host of private equity asset sales by financial institutions. Bank of America sold a portfolio of LP stakes valued at $1.3 billion to AXA Private Equity. Lloyds Banking Group sold a £470 million (€553 million; $738 million) set of LP stakes to Coller Capital and Lexington Partners. Those were just two of many portfolio sales of fund interests; there were also disposals of direct assets, as well as entire in-house groups.
But if last year was the “year of the bank” on the secondaries market, 2011 may shape up to be the “year of the public pension”, say industry insiders.
Currently looking to lighten its $48 billion load of private equity holdings is the US’ largest public pension, and one of the biggest private equity investors in the world, the California Public Employees’ Retirement System.
CalPERS has hired UBS for what is reportedly being called “Project Alpha”: the sale of $800 million-worth of stakes in limited partnerships, mostly with mega-buyout firms. It is reportedly selling 20 percent of its holdings (largely unfunded commitments) in funds managed by Kohlberg Kravis Roberts, the Carlyle Group, Silver Lake Partners, Providence Equity Partners and Apollo Global Management.
Using the secondaries market is nothing new for CalPERS. It gained board approval to do so in 2005 and in late 2007 pared down its portfolio, selling $2.1 billion of fund interests in a series of transactions that removed 80 fund interests, tied to 60 GPs, from its massive private equity portfolio.
But now other public pensions, with much newer private equity programmes, are also looking to the secondaries market to help manage their portfolios.
New Jersey’s $70 billion state pension is mulling the sale up to $1 billion-worth of its holdings, though one one source told PEI “nothing is imminent” and others have said the pension will not sell unless bids are adequately high. The pension launched its private equity programme in 2005 and fairly quickly amassed a large portfolio that, along with individual fund commitments, also includes specialised accounts managed by Credit Suisse.
North Carolina’s state employees’ pension is also reportedly putting an offering on the market, while the $14 billion New Mexico State Investment Council, which manages the state’s oil and gas endowment, has also been formulating plans for a secondaries sale to pare down its portfolio.
“Not many US pensions have [sold] anything” in the past, one secondaries market professional told PEI. “2011 may be the ‘year of the pension’ in North America.”
The pensions have likely become more interested in sales given the bid-ask gap for limited partnership interests has significantly narrowed and subsequently so has any “headline risk” that would come with selling holdings at a discount. Starting last year, the average high bid for all private equity funds started to climb, and that continued through the second half of 2010. The average high bid in the second half of 2010 was 84.3 percent of net asset value, compared to 79.6 percent during the first six months of the year, according to data from secondaries advisory firm Cogent Partners.