UBS to run NYC private equity secondary sale

The city’s pension system has put an initial offering of about $750m-worth of LP stakes on the secondary market, kick-starting what could be a very busy year for private equity secondaries.

Activity on the private equity secondary market in the early part of 2012 can be characterised by one word: intense.

Among several large portfolios on the market, New York City’s $115 billion pension system has hired UBS to run a sale of about $750 million of private equity holdings, the first of what could ultimately be a sell-off of about $2 billion-worth of the system's LP stakes.

The secondary sale is an essential part of the retirement system’s plan to have a completely “reinvigorated” private equity programme within three years. New York City is selling stakes in private equity funds to “end up with less managers and make room for new ones”, according to one market source who has seen the offering.

It’s not clear which funds are part of the offering. The sale represents a mix of investment vehicles, with the bulk being buyout funds, said the source. Last year, Bloomberg reported the system may sell stakes in funds managed by Clayton, Dubilier & Rice and Silver Lake.

The system is not looking for any specific type of sale, and will examine offerings for individual stakes or bigger chunks of the portfolio, said a source in the market familiar with the sales process.

The New York City retirement system and UBS did not return requests for comment.

Shaking up the programme

New York City’s system, which is made up of five different pension funds, put out a request for proposal last year for a firm to run a sale of interests in private equity funds. The RFP said the pension system may also sell interests in real estate funds.

New York City will not be a “distressed seller”, the system’s head of private equity Barry Miller told Private Equity International in a prior interview, and will only transact for the right price.

“There’s a diverse group of buyers out there and an enormous amount of demand,” Miller said at the time.

The system, like numerous other public pensions in the US, wants to use the secondary market to shake up its private equity programme, cutting its exposure to the asset class to free up space to commit to managers out in the market.

New York City’s goal is to make $2.5 billion in annual commitments to private equity for the next several years, allocating more capital to fewer managers, according to Lawrence Schloss, chief investment officer in the Office of City Comptroller John Liu, who spoke to Private Equity International in an exclusive interview in October.

Schloss, who was hired in 2010, worked with top pension officials for months analysing the private equity programme and determined the system had committed to too many managers in 2006, 2007 and 2008. The vision for the system's private equity programme was, within three years, heavy weighting toward first quartile managers, top emerging managers and some European funds.

The system has already moved forward on that goal, committing $225 million to Vista Equity Partners, which is raising its fourth fund targeting $2.5 billion, and $300 million to Leoard Green & Partners, which is targeting $5 billion for its sixth fund.

The retirement system’s overall exposure to private equity was valued at about $8 billion, split up among the five pension funds, as of 31 October, according to the city comptroller’s web site. The teachers’ and public employees’ funds have the biggest commitments to the asset class, standing at $2.2 billion and $3.4 billion, respectively, as of 31 October.

Other US public pensions have used the secondary market to restructure their programmes. New Jersey’s state pension system has been selling up to $1 billion-worth of private equity interests, and in December reported that it had generated $268 million in sales proceeds from interests in funds managed by GTCR, Madison Dearborn and TPG. North Carolina’s state treasury and the California Public Employees’ Retirement System sold big chunks of their portfolios last year.

Busy market

New York City’s offering is one of several that have either come to market or that are anticipated in the early part of this year. Numerous institutions, including public pensions, banks and endowments, wanted to sell LP stakes last year but pulled back after volatility roiled the public markets over the summer.

Those sellers are likely to restart their sales processes during the first half of this year, secondary market sources have told Private Equity International.

“There’s a fairly good line of large pensions looking to move product basically waiting for fourth quarter [fund] reports,” said one secondary investor. Another secondary market investor said: “The bulk [of sellers] are still banks and financial institutions. I say bulk because those portfolios are so big.”