Pricing for private equity fund stakes has come down this year, with double-digit discounts the new norm and anecdotal accounts from advisers that ’85 [percent of net asset value] is the new par’.
For the $217.5 billion Florida State Board of Administration, discounts in the secondaries market represent a buying opportunity and a way to increase its exposure to specific sectors. In minutes published this month detailing the pension’s June investment committee meeting, pension officials said the pension had set up an opportunistic separately managed account with Aegon Asset Management to invest in smaller and sector-specific opportunities.
“What it allowed us to do and how we’ll use it is to tactically invest in secondary transactions, frankly, when we think there is a good opportunity to do so,” John Bradley, senior investment officer, private equity, said at the meeting.
The Tallahassee-based pension set up the the account, which is a $100 million vehicle named FSBA AAM I, last year in expectation of a time when valuations would decline, Bradley said.
“We’re feeling kind of a pinch in terms of our allocation to private equity, relative to targets, [and] others have to be feeling the same thing. So let’s put something together that, when the market does break, will allow us to go in and perhaps buy things at pretty large discounts to market value with pretty attractive go-forward returns.”
As of the time of the meeting on 28 June, Bradley said such an environment could be around the corner.
“We’re pretty excited about how we might use that [the SMA] over the coming years,” he added.
LP appetite for buying fund stakes has been increasing. In affiliate title Private Equity International‘s LP Perspectives 2023 Study, published this month, 30 percent of LPs said they plan to only buy fund stakes on the secondaries market. This is up from 28 percent of respondents in last year’s survey and the highest proportion in at least four years.
When combined with those that said they plan to both buy and sell fund stakes, the proportion rises to 36 percent – also a slight rise on last year.
Florida SBA has been using its separate account to bid on energy fund stakes from sellers who either want to exit the sector for returns reasons or for ESG reasons, Bradley said.
“You can buy these portfolios at very attractive discounts,” he said. “We’ve all seen what has happened in the commodity price run up. I’m not sure if we’ll get something done, but we’ve been trying.”
Florida SBA has also been an active user of the secondaries market for sales. On its tech exposure, Bradley said the pension sold almost $1 billion-worth of tech exposure on the secondaries market in the third quarter of last year when it “felt like valuations got ahead of the market”.
When asked whether the pension would consider selling some of its private real estate fund exposure to reduce risk, Stephen Spook, senior investment officer of real estate, said it could be a possibility.
“We would consider it,” Spook said. “It’s only until recent years that we’ve begun doing some sector specific funds, so industrial-type funds, [residential]-type funds, alternative focus funds. We don’t really have a lot of funds that are focused on the areas we’d like to lighten up on. It wouldn’t be as helpful as you would think.”
On performance, Bradley said the state pension’s secondaries portfolio has outperformed its benchmark over all time horizons and has outperformed public markets by 700 basis points.
“We expect our secondary funds to be active over the next six-to-12 months as limited partners potentially have liquidity issues and need to sell,” Bradley said.
“We started to see that a little bit, but it’s just going to take public markets being down for a time and people starting to say, okay, we have finally gotten to the point where we have to sell, and we’ll see if that creates an opportunity.”