CDPQ runs process to sell partial stakes in funds as LPs scramble for liquidity

Canadian pension system Caisse de dépôt et placement du Québec is selling a private equity portfolio of fund interests and co-investments, offering partial stakes in the fund exposures, sources told affiliate title Buyouts.

The process is part of a surge of LP portfolios that have hit the market this year as institutions look for ways to generate liquidity and rebalance their exposure to the asset class. The major obstacle to getting such processes completed is pricing, where a gap remains between buyer and seller expectations.

CDPQ’s portfolio is considered high quality, with interests in funds from GPs including Genstar, CVC Capital Partners, Brookfield Capital, CD&R, Silver Lake, Veritas Capital and Stone Point. The expectation is pricing should be high on the deal, two sources said. The system is working with Evercore on the deal, sources said.

Pricing on LP portfolio sales has generally included discounts to net asset value of between 10-20 percent, though that has recently strengthened.

Last year, average pricing for LP sales was 81 percent of net asset value, an 1,100 basis-point decline from 2021, according to Jefferies’ 2022 secondary volume survey. As of the first quarter, pricing for buyout funds was hovering around 85-90 percent of NAV, according to PJT Park Hill.

Interestingly, CDPQ is offering only partial stakes in the fund interests – around 5-6 percent. In this way, the system will be able to generate liquidity from the portfolio and not completely exit funds it wants to stay in.

“They don’t want to part ways with their very core relationships. They’re selling 5 percent of funds doing really well, what do they lose in selling small portions of it,” a secondaries market source said, adding that if CDPQ’s sale is successful, other systems may try out similar structures.

Generally, LP portfolio sales involve full exits from select funds. But in this market, sellers are finding creative ways to bring capital in from their private equity exposure at a time when exits have dried up and distributions slowed.

CDPQ explored a large sale last year, but decided to hold off as markets deteriorated and pricing outlook appeared bleak. The system last sold a portfolio in 2021. CDPQ sold a $1.3 billion private equity portfolio in 2018 to an investor group led by Goldman Sachs.

CDPQ had about $401.9 billion in net assets as of 31 December 2022, the system said, with about $80.7 billion in private equity assets. Around 74 percent of the portfolio was in direct investments, CDPQ said on its website.

LP sales led volume last year, and they appear to be leading the way this year as well. LP-led deals were about 61 percent of total volume in the first half, reaching $25 billion out of the estimated total of $42 billion, according to Evercore. Such deals made up 49 percent of activity in the first half of last year, Secondaries Investor reported.

Other LP deals in the market include New York State Teachers’ Retirement System, selling a portfolio valued at up to $6 billion; and Horsley Bridge Partners, selling a portfolio of stakes in venture funds valued at up to $1 billion.