Connecticut considers being a buyer and seller of secondaries

Amid challenging dynamics in secondaries, Connecticut’s state pension system is exploring acting as both a buyer and seller on the secondaries market.

Interest in secondaries funds has grown as LPs sort through overallocations and dwindling cash flows, and GPs look for ways to deliver liquidity back to existing fund investors.

Connecticut Retirement Plans and Trust Funds‘ investment advisory committee approved $350 million in commitments, split equally between HarbourVest Partners’ latest flagship secondaries fund and a connected co-investment vehicle at its 10 May meeting.

Connecticut’s investment staff also discussed the potential sale of a portion of its private equity portfolio at the meeting.

Affiliate title Buyouts listened to a broadcast of the meeting.

The $46.1 billion system selected Mozaic Capital Advisors last year as its secondaries adviser to help the system figure out what private equity assets to sell. Buyouts previously reported Connecticut could sell a portfolio valued between $400 million to $500 million.

Principle investment officer Mark Evans said the system continues working with Mozaic on a secondaries plan but gave no timetable for when this may occur.

HarbourVest is targeting $12 billion for Dover Street XI and $1.5 billion for Secondary Overflow Fund V, which is limited to investors who committed at least $100 million to the flagship fund.

Evans touted the attractiveness of buying into a secondaries fund as many LPs are shedding assets due to overallocation to private equity. GPs are also looking to secondaries funds to return capital to LPs, raise capital for new funds or to hold onto quality assets in a tough exit environment.

But both ends of the secondaries market face challenges. LPs are reluctant to sell at the steep discounts demanded by buyers – averaging around 10-15 percent to net asset value. And GPs are hesitant to sell their assets in GP-led transactions at discounts, with only the top-quality assets transacting.

“It’s not a great time to be both a buyer and a seller in the (secondaries) market. But there are other objectives you sometimes have when cleaning up a portfolio,” Evans said.

HarbourVest plans to allocate between 60 percent and 70 percent of Dover XI’s portfolio to complex transactions like GP-led secondaries, according to board documents.

“LP transactions are offering larger discounts. GP-led secondaries aren’t offering much of a discount, but they include very high-quality assets you’re buying through a secondaries fund. These are high-quality GPs managing great assets,” said Evans.