North American public pensions: reluctant leaders

Large North American public pension plans may be fuelling one part of the secondaries market, while pouring cold water on another.

Los Angeles City Employees’ Retirement System has become the latest public pension to allow itself to sell stakes on the secondaries market. While it didn’t go into specifics about what it will sell and when, the pension noted that it has a $132 million “mature” bucket of stakes of vintages between 1995-2006, and a $555 million “maturing” bucket of stakes of vintages between 2007-2011, which seem like good candidates.

LACERS is the latest of many public pensions to change its investment policy to  allow it to sell on the secondaries market. Encouragingly, they are doing so for a diverse array of reasons. In January, Secondaries Investor reported that Pennsylvania Public School Employees’ Retirement System is planning to sell a portfolio as a way of reducing the fees it pays to external managers. The sale is contingent on the portfolio selling for at least 100 percent of net asset value based on June prices.

The same month Canadian pension PSP Investments shopped a $1 billion strip of private equity assets in order to get some unfunded commitments off its books, a de-risking measure ahead of an expected economic downturn. With dry powder and leverage likely to keep prices firm, stake sales by public pensions are likely to be a major driver of volumes once again this year.

On the complex secondaries side, public pensions could play a rather different role.

Last month, Oregon Public Employees Retirement Fund said buyers and advisors had become notably more “aggressive” in recent years, an opinion that others have expressed to Secondaries Investor. The pension was receiving growing numbers of proposals for deals that it feels risk breaking down GP-LP alignment.

At the same time, there is disquiet among large public pensions about their role on LP advisory committees, says a lawyer who advises many of them. Despite them having no fiduciary duty to their fellow LPs, they are aware that when they are being consulted on a GP-led process, their view has a strong bearing on how other smaller LPs will act.

With proposed deals getting more complex and the potential conflicts less clear, will they want to continue in this de facto leadership role if they run the risk getting dragged into legal action years down the line, brought by an unhappy LP? Possibly not.

Hopefully, the ILPA guidelines around GP-led deals, coming out in a couple of weeks’ time, will provide the clarity needed to ensure public pensions remain at the heart of the secondaries market on the traditional and complex side.

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