Side Letter: CalPERS’ secondaries shake-up; US debt discourse; PE’s token potential

CalPERS wants its staff to have more authority when it comes to secondaries sales. Plus: an update from the US private debt market and why private equity's foray into tokenisation may only just be getting started. Here's today's brief, for our valued subscribers only.

Just happened

CalPERS: seeking more autonomy when it comes to secondaries (Source: Getty)

Second chances
California Public Employees’ Retirement System has proposed giving its staff more authority to sell stakes on the secondaries market, months after executing the largest-ever portfolio sale. Under proposals to be discussed at its 19 September investment committee meeting, the pension fund’s chief investment officer would gain the authority to sell $6 billion-worth of private assets; the deputy CIO $4 billion; and the managing investment director $2 billion, without investment committee approval, according to documents prepared for the meeting. It will also propose giving the deputy CIO the authority to buy $2 billion of stakes on the secondaries market without prior approval.

In relation to delegated authority, continuation fund processes involving single-assets would be treated as co-investments and, under the new proposals, the new CIO would be allowed to make $1.5 billion of co-investments without committee approval. Over the summer, CalPERS sold $6 billion of PE stakes to buyers including Lexington Partners and Glendower Capital at a discount as high as 10 percent of NAV, our colleagues at Secondaries Investor reported (registration required). The sale coincided with CalPERS’ shift from holding a large portfolio of GP relationships to more concentrated interests, separately managed accounts and co-investments.

Institutional investors have been increasingly selling on the secondaries market for portfolio management reasons this year, so giving senior CalPERS individuals more leeway to do this is unsurprising. Giving the deputy CIO the authority to spend billions on acquiring fund stakes would increase the number of senior staff who have this authority and could signal a change for the pension, which many look to as a bellwether.

US debt discourse
Amid rising interest rates and an inflationary environment, US private debt professionals are able to look on the bright side. Participants in a roundtable, forming part of our colleagues at Private Debt Investor‘s US Report (registration required), pointed out that rising rates translate to an increase in coupons and widening spreads – theoretically boosting returns in the process. The floating-rate nature of many loans is a favourable attribute in today’s environment, though there is another side to the coin. Those present expressed concerns about how tough it may become for borrowers to service their debts as cashflow pressures increase, especially for those borrowers heading into tougher times with large amounts of leverage on their balance sheets.

For the time being, it seems the pain is not being felt to any significant degree. One participant noted that fewer companies than ever are on the firm’s ‘early warning list’ and there are scant signs of distress at this point. In the US at least, a strong labour market and resilient consumer demand appear to have mitigated inflationary pressures and supply chain issues so far. While this would seem to be good news, participants said that increases in the cost of financing – understandable on a forward-looking basis – are hard to explain to borrowers when they’re not yet experiencing too many difficulties. Indeed, much of the conversation is of a speculative nature, ruminating on possible outcomes.

Disruption Matters
The forces of disruption have always been at play in the business world, and every era has its own unique challenges. Is the pace of disruption accelerating? And if so, how can private markets operators be sure that they are pulling the right value creation levers to meet the moment? That’s the subject matter of PEI’s new podcast miniseries Disruption Matters, found in the PEI Spotlight feed. Produced in partnership with AlixPartners, Chase Collum and Rob Kotecki ask operating partners and experts from across the PE operating universe how they are facing the myriad challenges of these unprecedented times. Episode 3, ‘Outmanoeuvering Cyber Threats’, is out now, with episode 4, ‘Digitising With a Purpose’, to follow on next week. Find all the earlier episodes here.


Not a done deal
M&G-owned impact manager responsAbility Investments is awaiting the result of a legal appeal process – putting its fund of funds strategy on hold – before it can deploy a recent mandate it received from development finance institution Swiss Investment Fund for Emerging Markets, our colleagues at New Private Markets (subscription required) report. That is unfortunate timing for Ralph Keitel, former principal investment officer and head of Asia at the International Finance Corporation, who joined responsAbility this month. SIFEM awarded the Zurich-based manager a mandate of over $800 million in February this year. The mandate is due to last from now to the end of 2027, with the option to extend it for another five years. It seems, however, that responsAbility will not be able to take over management of the portfolio so soon. Bern-based impact firm Obviam, which has held the mandate since 2011 and BlueOrchard, the impact firm of Schroders, have lodged an appeal with Switzerland’s Federal Administrative Court.

Worth token a closer look
Tokenisation is a nascent and intriguing concept we’ve written about over the past year (if you’re not yet familiar with how it all works, read our guide here first). The concept of substituting sensitive data with a non-sensitive equivalent, ie, a token, has already won significant fans in PE, including Partners Group and Hamilton Lane. So just how big could this area become? According to Oi-Yee Choo, chief executive of Singapore-based tech platform ADDX, rather big.

“Asset prices can only rise to their true economic value if the barriers to investor participation and ownership transfer can be lowered,” Choo said in a statement about predictions of tokenisation growth. “Blockchain changes the game because it can be applied cost effectively to private markets and alternative assets, where investors are fewer in number, albeit wealthier, and products are more bespoke. The result should set our hearts racing: assets can be liquid for both public and private markets.”

ADDX and consulting outfit BCG estimate that asset tokenisation will grow to a $16.1 trillion market by 2030, driven by demand for private markets exposure. That’s a 50-fold increase on where the market stands today at $310 billion.

Today’s letter was prepared by Alex Lynn with Rod JamesCarmela Mendoza and Madeleine Farman.