Conversus touts co-investments and secondaries

Several US pension funds have adopted a similar strategy in an effort to cut ties with GPs and eliminate management fees.

Conversus Capital chief executive officer Bob Long has reinforced a popular notion floating through the limited partner universe while going over the Guernsey fund-of-fund’s second quarter earnings report: it’s all about secondaries and direct co-investments.

“The co-investments we’ve seen… we’re seeing returns in the range of traditional private equity,” said Long.

The firm, which holds $1.9 billion in assets, has already made one $5 million direct investment. Two other investments, valued $20 million and $30 million, cumulatively, are pending, said Long.

With the feast-or-famine fundraising atmosphere, fund managers are linking co-investments to past or future fund commitments, Long said, adding that increased availability of direct investments also contributed to the firm’s decision to pursue that strategy.

In January, chief financial officer Tim Smith indicated that the firm was finding investments in secondaries and direct investments more attractive because of greater returns to those asset classes.

Several large US pension funds have adopted a secondaries and co-investment strategy as they cut off relationships with existing general partners. The Teacher Retirement System of Texas has that direct investments could eventually grow to as much as 20 percent of the pension fund’s private markets portfolio, TRS told Private Equity International.

In an effort to eliminate costs raised by management fees, the California State Teachers’ Retirement System is also planning to expand its direct investment allocation. The California Public Employees’ Retirement System recently entered the secondaries market, selling off around $800 million in assets and increasing its direct investments to cut GP relationships.

Conversus ended the first half of 2011 with an estimated net asset value per unit of $30.08, an 8.6 percent increase from its 31 December 2010 NAV per unit of $27.71. The firm’s per-unit share was “disappointing”, Long said, landing 22 percent below the $30.08 NAV. Net portfolio cash flow was $231.2 million, with $327.6 million in distributions and $91.4 million in capital calls.