By David G. Barry
The California Public Employees’ Retirement System
(CalPERS) has made what industry observers say is the largest-ever
secondary sale of private equity fund stakes. What remains to be seen is whether
the sale leads to a surge in secondary transactions by other institutional
investors.
The $440 billion public pension fund sold some $6 billion of its stakes in
funds over the past two weeks, according to Bloomberg. The financial
information provider said the stakes were acquired by Lexington Partners,
which is part of Franklin Resources Inc., and CVC Capital Partners’ Glendower
Capital. It represents more than 10% of its $50 billion in private equity
holdings.
The sale comes at a time when many other public pension funds find themselves
overallocated to private equity and are deciding whether to try to rebalance
through secondary sales. The decision has been made tougher by the fact that
valuations are declining.
CalPERS, though, moved ahead, desiring the capital to make new investments.
According to Bloomberg, CalPERS sold its holdings at a roughly 10% discount to
their September 2021 value. It, however, sought to reduce the pain by deferring
some payments beyond June 30, the last day of its fiscal year.
In a prepared statement, CalPERS Chief Investment Officer Nicole Musicco
said the “sale positions us to act on our new asset allocation and allows us to
capitalize on market opportunities.”
CalPERS did not disclose what funds it sold, but Bloomberg described them as
older buyout and growth strategy funds. A spokesperson for the plan did not
return messages seeking additional information.
According to published reports, CalPERS hired Jefferies Financial Group Inc.
earlier this year to shop the assets.
With $63 billion of private equity secondary sales, 2021 was a record year for
the industry, according to Campbell Lutyens & Co., a secondary industry
advisor.
Commenting on how LPs are approaching the secondary market
in today’s environment, Keith Brittain, a managing director on Hamilton
Lane’s secondary investment team, said that with the “dynamic” of numerous
institutional investors being overallocated to private equity, Hamilton Lane is
expecting an increase in the supply of LP secondary opportunities. But he also
said that if secondary discounts continue to widen, LPs may try to bridge the
price gap with purchase price deferrals or delayed closings, or they may not
sell all of the fund stakes they have up for sale.
Still, Brittain said, “we would expect continued
growth, although that growth may not be in a straight line.The overallocation issue is real.”
Iyobosa Adeghe, a principal with secondary-focused firm Coller, agreed, saying that “while the macro environment is causing a short-term slowdown in transaction volumes, fundamental interest in the maket remains strong.” He added that while all portfolios are impacted to some degree” by lower pricing, portfolios “that are younger, higher quality, or which have less direct public exposure are seeing less pricing impact than their counterparts.”