Commentary

New Mexico’s premium prices

The New Mexico State Investment Council’s recent secondaries activity should encourage other LPs to take advantage of full pricing and demand.

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Investors who haven’t yet embraced the secondaries market as a tool for active portfolio management would do well to look to New Mexico.

The New Mexico State Investment Council has been restructuring its portfolio and taking advantage of the secondaries market’s high prices and increasing demand, having completed two portfolio sales in the last six months that commanded above-par prices.

Earlier this week, we revealed New Mexico’s sale of three European fund stakes to Partners Group. The endowment sold stakes in 3i Eurofund V, Apax Europe VI and Apax Europe VII for roughly 2 percent above their net asset value. New Mexico declined to disclose the NAV of the fund stakes, but they had a combined exposure (NAV including unfunded commitments) of $88.5 million, as of December 2013, according to New Mexico documents.

In April New Mexico auctioned a portfolio of four fund stakes, which also went for above par to Pomona Capital. The sale included Cinven funds III and IV and Clayton Dubilier & Rice funds VII and VIII, which had a combined exposure of $155.9 million, as of December 2013.

These types of sales are no longer outliers.

During the first half of the year, the average high bid for buyout fund interests reached 100 percent of NAV for the first time since 2007, according to Cogent Partners, which believes we may even see a period where pricing is regularly coming in at 5 to 10 percent above NAV.

Many other LPs are in New Mexico’s position, in that investors with mature private equity portfolios are likely to have more relationships on their books than they can adequately manage with in-house resources (New Mexico has around 80 GP relationships across 120 funds, for example). Market participants and observers agree now’s a particularly attractive time for LPs to fine-tune and restructure their holdings.

“As more capital is becoming available through the secondary funds market, it is driving both pricing and the size of the transactions themselves”, Ed Gander, co-head of the global private funds group for Weil, Gotshal & Manges,told us this week. “As the whole alternatives asset class is becoming more mainstream, there’s a lot of portfolio reorganisation going on.”