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Lexington emerges as buyer of CalPERS portfolio amid pricing uncertainties

The challenges of selling such a big offering are highlighted by growing uncertainty around secondaries pricing, weakening amid public market volatility, rising inflation and geopolitical shocks from Russia’s invasion of Ukraine.

Lexington Partners has emerged as a buyer of a chunk of a massive portfolio of private equity fund stakes being shopped by the nation’s largest public pension system.

The California Public Employees’ Retirement System‘s portfolio, which at up to $6 billion would be one of the largest secondaries offerings, is among a handful of big LP secondaries portfolio sales to hit the market since last year. The CalPERS portfolio stands out as the biggest, and therefore potentially the hardest to actually sell.

Secondaries Investor and affiliate title Buyouts reported in January that CalPERS was shopping a large portfolio.

The challenges of selling such a big offering are highlighted by growing uncertainty around secondaries pricing, which is weakening amid public market volatility, rising inflation and geopolitical shocks from Russia’s invasion of Ukraine.

However, some LP fund stakes will get snapped up by buyers who know the sponsors and the underlying portfolio. That may be the case with Lexington, which as a long-time secondaries buyer is also one of the industry’s largest LPs. The likelihood is that Lexington has a lot of overlap with the CalPERS portfolio, sources told affiliate title Buyouts.

Pricing as of the fourth quarter came in around 97 percent of net asset value for buyout funds, according to Jefferies’ full-year volume report. That strong pricing is expected to change for year-end and first-quarter valuations, sources have said.

Lexington is buying around one-third of the $6 billion portfolio, so somewhere in the range of $1 billion- to $2 billion-worth, three sources said.

Spokespeople for CalPERS and Lexington declined to comment. Jefferies is understood to be working as secondaries adviser on the sale.

The portfolio is a mix of tail-end funds and stakes in blue-chip funds, sources said. The rationale is not clear, although one source said the system is shifting from a large portfolio of numerous GP relationships to more concentrated interests, separately managed accounts and co-investments.

The system is not getting out of private equity, as it increased its allocation target to the asset class to 13 percent, from 8 percent, in November. This indicates that rather than backing away from PE investing, the system is looking for ways to have more direct access to top managers at lower cost.

CalPERS trustee Margaret Brown told Secondaries Investor in November that the pension could explore a secondaries sale to help clean up tail-end exposure: “We have some really old private equity that’s just sitting there doing nothing. I call them zombies.”

The Sacramento-headquartered pension has not engaged in such a large sale of PE interests, although it is possible it has opportunistically bought and sold individual stakes in funds. The system caught market attention in 2015 when it sold a portfolio of real estate fund interests to Blackstone Strategic Partners in a deal valued at $3 billion.

This report originally appeared on affiliate title Buyouts.