Réal Desrochers, head of private equity for the $277bn California Public Employees’ Retirement System (CalPERS), talks us through the benchmark LP’s secondaries strategy.
What is CalPERS’ current approach towards the secondaries market?
We’re actively hunting for funds from certain vintage years. CalPERS made a lot of commitments in 2006-2008, but then in 2009, 2010, 2011 we practically disappeared from the market, so we have a big hole in the portfolio.
So you’re selling 2006-2008 positions and acquiring stakes from 2009-2011?
The portfolio sales we’ve already done – that was done a few years ago, before I came on-board in 2011. We were going to go on the market to sell another portfolio of fund interests, but I stopped the process because I wanted us to better understand everything we have before we decide to sell. And for the first time now we have a really good fix on what we have in our portfolio.
Now we’re looking to buy into funds that were raised in 2007, 2008, 2009 because obviously they have five-year investment periods and we’re trying to fill that hole I mentioned. At this moment in time, we’re actively looking at three potential secondaries transactions.
People tend to think of CalPERS as a seller on the secondaries market more so than a buyer; is buying a new strategy?
No, we’ve been carrying the message for the last two years at least that we want to buy; but we want to buy specific vintage years that will fit into our portfolio. And the ideal thing we’re looking for is stakes from fund managers we already have in our portfolio. We know our portfolio well and try to leverage the knowledge we have so it’s easier to price [secondaries fund interests].
Why haven’t we seen you purchase anything yet?
We have not done any buying because it’s so pricey. We try to stay disciplined and as you know with auctions, the highest bidder usually wins and we’re not typically the highest bidder.
There’s so much money that’s been raised or being raised for secondary interests, that it’s really a seller’s market. There’s not a single week that goes by that people don’t call trying to buy something from us.
Unlike secondaries funds, we aren’t obligated to buy anything. If you’ve raised a secondaries fund, your LPs are expecting you to put that money to work and we think the market is pricey because of that. There’s a surplus of dollars looking to buy secondaries.
Does CalPERS invest with secondaries fund managers?
It’s not logical for us for a number of reasons. One is that we have 389 managers, 745 funds in the portfolio – so we’re an index fund. My job is to reduce that number so we can really have an impact. But when you invest in a secondaries fund, they buy secondary fund interests but they also typically invest in some primaries as part of their business model. That would be compounding our headache.