Arkansas Public Employees Retirement System will implement a private equity programme for the first time that will focus three-quarters of its portfolio on secondaries investments.
The $10 billion Arkansas PERS fund is a laggard among US state pension systems in that it hasn’t included private equity in its investment mix. The system is embarking on a unique strategy that plans on dedicating 75 percent of its commitments to secondaries with the remainder focused on traditional fund of funds vehicles.
Arkansas PERS approved a plan to start a private equity programme at its 15 February meeting with plans on reaching a 5 percent target allocation by 2029, according to documents provided by consultant Callan. Affiliate title Buyouts reviewed the documents.
Arkansas PERS has not determined if it will invest in secondaries funds or if it will buy on its own, chief investment officer Carlos Borromeo said via email.
According to Callan’s pacing plan, Arkansas PERS will invest $500 million in secondaries this year.
From there, the system plans on committing $450 million to secondaries in 2026 and $200 million each in 2029 and 2032, bringing it to a total of $1.35 billion, according to Callan’s presentation.
The secondaries-heavy strategy will result in distributions returning to the system as soon as 2024 and turn cashflow positive in 2030, according to Callan’s presentation.
Callan also says the secondaries strategy would occur between years three and five of the life cycle of a private equity investment.
The strategy behind investing so heavily in secondaries may help jumpstart the portfolio in several ways, according to various sources.
The system “will have a combination of relatively instantly diversified exposures across vintage, asset class, and sector, no J-curve, access to a cash-flowing asset and shorter duration”, one source said.
Arkansas PERS may also benefit as secondaries are trading at discounts of 10-20 percent to net asset value, sources have told Buyouts in past interviews.
The pension plans on making $75 million in commitments to a primary fund of funds in 2023, followed by $50 million from 2024-2028, and $25 million from 2030-2032.
“The larger initial commitments will help bridge the gap to full funding, and commitments are then reduced as the portfolio approaches its target,” according to Callan.
Callan’s presentation also notes the pacing model will be refined after specific managers are selected.
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