New Jersey State Investment Council board members said they were alarmed about possible “inter-trading” between private equity funds to boost valuations in a volatile market.
As exit activity slows, drying up distributions, managers are seeking options to deliver liquidity to their LPs. These include selling the asset to another manager, creating a continuation fund for more time and capital to grow the asset, selling a minority stake in a company to another GP or acquiring the company using capital from a new fund, known as a cross-fund investment.
The chief investment officer of Denmark’s largest pension fund compared these practices to a “pyramid scheme” at an industry conference in France last month.
The pyramid scheme comparison made its way to the New Jersey meeting held on Wednesday. Affiliate title Buyouts watched a webcast of this meeting.
“Trading within managers is not healthy and the issue is going to get more attention, especially with an extreme decline in markets,” said board member Ted Aronson after referencing the “pyramid scheme” comment.
Board member Wasseem Boraie said he was concerned managers were not putting dry powder to use.
“All I see is inter-trading with next generation funds,” Boraie said.
New Jersey Division of Investment CIO Shoaib Khan said the system tries to earn LPAC seats to review a manager’s transactions.
“We want to try and have input, so we don’t see too much inter-trading,” Khan said.
New Jersey’s private equity portfolio’s largest exposure is to mid-market buyouts at 57 percent, followed by large-cap buyout at 15 percent, according to Khan.
Focusing on mid-market buyouts allows New Jersey to give more operational input to managers, Khan said.
Michelle Davidson, the co-head of private equity consultant Aksia, said limiting exposure to select managers also helps protect against inter-trading.
“This is where you have to be thoughtful so you’re not just trading against yourself,” said Davidson.
New Jersey’s private equity portfolio returned 6.15 percent for the fiscal year ending in June, according to Khan.
As of the end of June, the $87.5 billion system allocated just under its 13 percent target to private equity.
– This report first appeared on affiliate title Buyouts.