Montana doesn’t want to rely on secondaries for liquidity

Despite a successful secondaries sale last year, the Montana Board of Investments doesn’t want to have to rely on the secondaries market again any time soon in case of liquidity needs, according to recent comments from its chief investment officer Clifford Sheets.

Like most pension funds, the Montana Board of Investments constantly has to make sure it has enough cash on hand to pay plan benefits each month.

In the first half of 2014, the secondaries market provided a good avenue for the $13.8 billion pension fund to easily access liquidity.

It sold interests in eight private equity funds with net asset value of about $126.6 million to three different buyers for a total purchase price of $133.6 million, Secondaries Investor previously reported.

The sale was successful because of of plentiful liquidity, a recent positive return backdrop in the public equity markets combined with low volatility, and a large amount of dry powder on the part of secondaries funds, Sheets wrote in a pension asset allocation recommendation memorandum presented to members of the board on Tuesday.

But this might have been a one-off for the pension plan.

“We should not rely on this type of asset sale in the future, but this example shows that selling such assets is quite do-able and thus a definitional distinction between so-called liquid and illiquid assets is not so pure,” he wrote.

Traditionally, private equity assets have been considered some of the most illiquid assets in a pension plan’s portfolio along with real estate, especially compared to public equity, which can be sold quickly and easily

A maturing secondaries market has helped blur the lines between liquid and illiquid assets as it has rendered private equity assets more liquid. But this is only true in times when financial markets are robust and the economy is in relatively good shape, as Sheets noted.

“Remember that market liquidity can be temperamental and can deteriorate in stressed markets when liquidity is most important,” he wrote. “Even certain kinds of publicly-traded assets are not readily saleable at what would be considered fair value in times of extreme stress as we saw during the 2008-2009 global financial crisis.”