CalSTRS to revamp secondaries policy

California State Teachers’ Retirement System, the US’s second-largest public pension, will revamp its secondaries policies to allow it to participate in more complex transactions.

According to a draft policy paper presented at its latest investment committee meeting, private equity head Margot Wirth and portfolio manager Robert Ross recommended alterations to the terms under which secondaries transactions are carried out so they reflect the move towards restructurings, GP-led processes and other complex deal types.

The Private Equity Investment Policy has introduced a reference to secondaries transactions potentially involving “diversified (greater than three assets in a single transaction) or non-diversified (less than three assets in a single transaction)” asset pools.

It has also broadened its definition of the asset pools that can be bought or sold, stating that a pool can consist of “limited partnership interests, co-investments, general partner interests, separately managed accounts, portfolio companies, or a combination of the above”.

According to Wirth, the previous definition was “much more narrowly focused on the purchase and sale of single limited partnership interests”, and did not factor in the number and diversity of assets that can now be bought or sold.

With more complex transactions now commonplace, an “update to the asset types is necessary for CalSTRS to stay competitive”, according to marginal notes in the revised policy draft.

“Enabling staff to make a greater variety of secondary purchases will help staff reach its long-term allocation target faster with potentially reduced risk compared to committing exclusively to blind pools,” the document notes.

The broadened definitions of what a secondaries transaction can be should give the staff the “tools and boundaries” to carry out more complex deals, the paper says.

CalSTRS announced in 2016 that it was looking to offload private equity real estate assets. The fund noted in its 2016-17 business plan that $4 billion out of its $25.7 billion real estate portfolio is held in pre-crisis closed end funds.

“These older funds have impaired our performance; staff will aggressively push for liquidation over the next three years,” the plan noted, though no sale has taken place yet.

The paper also suggests changes to the Co-Investments, Direct Investments in General Partnerships and Separately Managed Accounts section of CalSTRS Private Equity Investment Policy.

Chief among these is higher transaction limits that take into account the fund’s growth and “the need to make larger commitments to maintain the private equity approved asset allocation target.”

Under the draft proposal, each co-investment shall not exceed the smallest of $250 million; 10 percent of the size of the LP investing in the transaction; or 100 percent of the limited partner’s investment in the transaction.

The existing limits, last updated in 2006, stipulate $125 million, 5 percent and 80 percent, respectively.

According to Setter Capital’s Volume Report for 2016, pension funds accounted for less than one percent of buyers in the secondaries market in the 2016 fiscal year, with secondaries funds accounting for 83 percent.

Pension funds were, however, the most active sellers, accounting for 37.3 percent of transactions.