Wisconsin, like many other limited partners, is planning a private equity co-investment programme and is seeking an investment professional to manage the effort.
However, the exact structure of the programme has not yet been determined. The board is deciding on whether to go with a model managed entirely in-house, or a hybrid that would combine internal capabilities with reliance on external managers.
The board expects to begin sourcing and screening opportunities in the first quarter of 2014, according to a presentation to the State of Wisconsin Investment Board’s trustees in May. The new hire is expected to start at the beginning of the third quarter, according to the presentation.
The investment board’s in-house model would target $100 million per year for three to five co-investment deals, according to the presentation. Benefits to the in-house model include fee savings and enhanced relationships with key general partners, according to the presentation. If the programme adopts a $100 million commitment structure, then fee savings could be $24.2 million over five years. Risks of this model, cited in the presentation, include loss of capital, adverse selection and deal execution.
In a hybrid model, Wisconsin’s investment staff and GPs would each contribute deal flow, but the GP would have discretion on whether or not to make a co-investment, according to the presentation.
Wisconsin would look for terms on a hybrid model of 1 percent management fee and a 10 percent carried interest. Management fee proposals ranged from 0.6 percent to 1 percent, while carry fee proposals were between 5 percent and 15 percent, according to the presentation.
The board presentation revealed that the system’s investment staff was not overly impressed with the firms or terms of the hybrid model.
Wisconsin had an active co-investment programme from 1986 to 2003, according to the investment board’s presentation. During the programme’s first go-round, 52 investments were made. The system was the lead investor in some deals. Toward the end of the programme’s life, 68 percent of capital was invested mostly internationally.
As of 31 December 2011, the investments had a 1.7x multiple and 14.7 percent net internal rate of return, according to the presentation. The programme ended in 2003 when the investment board’s strategy shifted to focus on fund investments, according to the presentation.
The Wisconsin State Investment Board’s assets under management are currently $89.2 billion, with about $6 billion from the system’s core fund in private equity.
Co-investing has become the strategy du jour among many LPs, as they look for greater exposure to direct investments, along with lower fees.
The Maine Public Employees Retirement System has $200 million it can spend on private equity and infrastructure co-investments without getting authorisation from its governing board, Private Equity International reported earlier. Maine’s Board of Trustees approved the co-investment programme earlier this year, allowing MainePERS investment staff to spend up to $25 million per deal and up to $100 million with any single general partner, PEI reported. Maine will co-invest only with GPs that it has already made a fund commitment with, according to Andrew Sawyer, chief investment officer of the retirement system.
The Teachers’ Retirement System of the State of Illinois launched its co-investment program in 2010 in an effort to overhaul of its private equity portfolio, which included plans to sell older investments and increase exposure to international funds and secondaries, PEI reported earlier.