A major GP-led secondary process that recently closed, run by Accel-KKR, featured a group of co-lead investors that included a US public pension – one of the rare times such an organisation has participated directly as a co-lead on a secondary deal.
Los Angeles County Employees’ Retirement Association, which has around $74 billion in assets, was a co-lead investor on the Accel-KKR multi-asset process that moved seven companies into a continuation fund for more time and capital to manage the investments. The total deal was valued at about $1.8 billion, which included $325 million in capital for follow-on investments. Affiliate title Buyouts reported exclusively last year that the deal was in the market. The firm completed an earlier GP-led process in 2019.
LACERA was a co-lead on the deal along with Goldman Sachs Asset Management, Singapore’s sovereign wealth fund GIC, LGT Private Capital and Portfolio Advisors. Evercore worked as secondaries adviser on the deal.
The deal gave LPs in Accel-KKR’s 2013-vintage fourth fund the option to cash out of their interests in the seven assets or roll their interests into the continuation fund. Existing LPs had the chance to substantially roll on their original terms, known as a “status quo” option.
The presence of a US public pension system as a lead investor is a reflection of the growing sophistication and the desire on the part of some big US public plans to take more direct roles in investment management. Traditionally, US public pensions have been content with their passive roles in private equity, but as Canadian pension systems like CPPIB and Ontario Teachers’ Pension Plan have established themselves as direct investors, some US plans are moving – at smaller scale – in a similar direction.
Part of the calculation is that directly investing alongside managers, especially through no-fee co-investments, helps to reduce the overall cost of the programme, while still reaping the benefits of private equity.
For LACERA, the Accel-KKR deal was a chance to advance its strategic transition from an allocator to an investor, alongside a manager already in its portfolio.
“We view GP-led secondary transactions as providing a number of benefits for our private equity program on behalf of our members, and we intend to continue to seek opportunities to take on lead investor roles in future GP-led secondary transactions where we have a high degree of conviction,” LACERA chief investment officer Jonathan Grabel said in a statement to Buyouts.
This structure gives a pension the chance to build exposure to earlier funds managed by a GP with whom they may only have commitments to newer funds. “By doing a continuation pool you can get into a fund that pre-dated your relationship with the GP,” a private equity manager said.
Participating as a lead investor on secondary deals is part of the system’s strategic goals for 2022, according to documents from the pension system. The system is pushing more co-investing and secondary investing as it works on reducing the cost of its investment programme, according to the strategic plan. Its “aspirational considerations” for this part of the plan include being “term-makers” not “term-takers” and to be a “prominent co-investment and secondary investor”.
The system in 2020 increased the amount of capital Grabel could spend on secondaries to $450 million, and the pension board agreed to allow LACERA to co-invest alongside managers approved by its adviser StepStone, Buyouts reported.
Accel-KKR is not LACERA’s first investment into a GP-led deal, though it may be the first time it has been a co-lead. In 2020, the system revealed in public documents that it had invested $70 million in a continuation fund raised by Ampersand Capital Partners, Buyouts previously reported.
The Ampersand continuation fund was created to hold three investments from prior funds, including the core asset Confluent Medical Technologies. The continuation fund raised $670 million and was led by StepStone Group, which also was LACERA’s private equity adviser at the time.
GPs also are offering LPs the chance to co-invest into secondary deals, even if not quite at the level of a co-lead. “Existing LPs get the chance to roll and reinvest and, in some cases, they upsize their checks,” a secondaries adviser who has worked on such deals told Buyouts last year. “As GPs think about total capitalization, a slice of that capital is co-investment from existing LPs.”
In 2021, California Public Employees’ Retirement System invested at least $239 million in the Hellman & Friedman GP-led process that moved three assets out of its seventh fund and into a continuation pool for more time and capital to run the assets.