Amid price uncertainty in the secondaries market, Houston Firefighters’ Relief and Retirement Fund is holding its first-ever sale of stakes in private equity funds as it works to manage its allocation, sources told affiliate title Buyouts.
Houston Firefighters’ is among a slew of public systems tapping the secondaries market to manage their private equity exposure. Many systems have made use of, or are considering using the market to hold down allocations that have escalated due to hefty private equity returns even as public holdings have dropped in the volatile markets.
Pricing for traditional LP portfolio sales is uncertain as private equity valuations lag the public markets by a quarter or two. Current portfolios are generally priced off of a reference date of 30 September, which is considered outdated at this point and requires a discount. Some sellers are choosing to hold off on sales until valuation marks are set for 31 December or even 31 March, sources said.
“A lot of sellers have pulled processes or delayed a launch,” a secondaries adviser not connected with the sale said.
Houston Firefighters’ pension has never held a large private equity sale, sources said. The portfolio currently on the market is valued at about $300 million, a spokesperson for the pension system confirmed to Buyouts. Jefferies is working as secondaries adviser on the deal, the spokesperson confirmed.
“The sale will only be completed if offers are attractive and the final amount may be more or less than $300 million,” the pension’s chief investment officer Ajit Singh said through the spokesperson.
The portfolio is made up of mostly mid-market funds, according to a source with knowledge of the transaction. “It’s a pretty good bellwether of where the market is, whatever they get on that portfolio,” the source said.
A portfolio of that size, relatively small compared to the big $1 billion-plus sales that hit the market since last year, should get a lot of looks, the source said. There is a larger universe of buyers who will look at smaller deals, as compared to the big mega-transactions, the source said.
Houston Firefighters’, like many public systems, is approaching the policy caps to its private equity allocation. The system had a 32 percent actual allocation as of June 2021, with a target of 25 percent that has flexibility to extend up to 35 percent, the spokesperson said.
The secondaries sale would be a way to bring the system’s allocation back into line. Systems have considered secondaries sales, as well as simply pushing up their allocation caps to build-in more cushion.
In part, sellers have sought to take advantage of the rich pricing in the market since last year. Pricing as of the fourth quarter came in around 97 percent of net asset value, according to Jefferies’ full-year volume report. That is likely to change, however, as macro factors like inflation, supply chain disruptions and geopolitical turmoil, along with anticipated interest rate hikes all hammer away at the market.
In 2021, GP-led secondaries deals like single-asset continuation funds represented about 52 percent of the $132 billion in total estimated activity, according to Jefferies’ full-year secondaries volume report, published this week. Traditional LP volume was $64 billion in 2021, representing a 156 percent increase from 2020, Jefferies said.
This article first appeared in affiliate publication Buyouts