Florida SBA: ‘We’ve lowered our return expectations’

The $205 billion Florida State Board of Administration is one of the largest investors in secondaries funds, backing vehicles from Ardian and Lexington Partners. John Bradley, senior investment officer, talks to Secondaries Investor about return expectations and its plan to commit as much as $1.5 billion to the strategy over the next five years.

Florida SBA has been investing in secondaries funds for at least two decades. How does the strategy fit into your PE portfolio and how has that evolved?

Secondaries have a 10 percent target allocation within the SBA’s private equity programme. We view secondaries as a diversifier and J-curve mitigant within our portfolio. Over time our use of secondaries has evolved from a more passive approach, where we simply allocated dollars to external managers, to one where we also use the secondary market to reposition and rebalance our portfolio.

What is your current versus target allocation to secondaries?

Our current allocation to secondaries is 6 percent. We have a target of 10 percent.

Pricing is at an all-time high for second-hand fund stakes amid record amounts of dry powder. What are your return expectations for secondaries and has this changed in the last year?

Record pricing and increasing competition for deals has led us to lower our return expectations for our secondaries strategies. However, this is not unique to secondaries. We also see the same trends throughout other private equity strategies, including buyouts, growth equity and venture capital. We focus on investing through cycles, and over a full market cycle feel our secondaries portfolio will be accretive to the overall returns of our private equity programme.

Your only PE secondaries managers are Ardian and Lexington. What were your motivations for partnering with these managers? Are you interested in different types of PE secondaries strategies outside theirs?

We have had longstanding relationships with Ardian and Lexington, dating back over 20 years in the case of Lexington. We have been very pleased with both and view them as the core of our secondaries portfolio. While we are always interested in looking at new or differentiated strategies that might complement those relationships, our focus has been on increasing our internal secondaries capabilities as a way to increase our allocation.

How much capital do you plan to deploy into secondaries over the next five years?

We are slightly below our target allocation to secondaries today. I could see us committing anywhere from $1 billion to $1.5 billion to the strategy over the next five years.

What are your thoughts on the new types of deals some secondaries firms are investing in, such as preferred equity, stakes in GPs and single-asset fund restructurings?

Some of what we see in terms of new types of deals in the secondaries market is just the industry evolving. As secondaries firms, GPs and LPs become more sophisticated, the solutions they can offer increase. However, it’s also a symptom of larger fund sizes and increased competition. In order to deploy capital and generate returns that are acceptable to their LPs, secondaries firms have had to get creative with deal types and move into new, non-traditional areas.

Do you have any plans to buy or sell fund stakes?

While we don’t have anything in the market today, we are always evaluating our options to sell and purchase fund stakes. Secondaries have become another tool to manage our portfolio and one that I believe we will increasingly use in the future.

John Bradley is senior investment officer at the Florida State Board of Administration.