Large pension funds seeking to make direct investments should purchase interests on the secondary market, according to Barry Miller, head of private equity at the New York City comptroller’s office, who was speaking at Monday’s Dow Jones Limited Partners’ Summit in New York.
“When we look at the portfolio for New York City, secondaries are very complementary,” Miller said. “Whereas with primaries it takes three to five years to wind them all the way down … in the secondary market we can actually put funds forward.”
Miller called deployment of funds for direct secondary investments a chance to “move the battleship”, allowing the $113 billion New York City Retirement System to reposition its portfolio more nimbly, without placing bets on long-term primary investments.
Earlier this month, New York City’s pension fund began the search for a firm to lead the sale of private equity and possibly real estate fund interests. According to Miller, the pension fund may also enter the secondaries market as a buyer.
Although New York City does not have the resources to allow it to be competitive in the acquisition of an entire secondaries portfolio, buying individual fund contributions is well within the pension fund’s reach, Miller said.
“I think we are enormous competition for a secondary buyer,” he said.
New York City is not alone in its foray into the secondaries market. According to the Coller Capital Global Private Equity Barometer released earlier this month, more than two thirds of Asia-Pacific LPs plan to acquire assets in the secondaries market over the next two years. Thirty-five percent of European LPs and 30 percent of North American LPs are also planning on acquiring secondaries.
Total secondary sales volume in 2011 is expected to reach a record level of $25 billion, according to a report from placement agent Triago, which estimates 2011 will be the fourth cash-negative year for most limited partners.
At a panel discussing the future of returns earlier that day, Scott Higbee, a partner at Swiss alternatives manager Partners Group, said he was surprised at the secondaries market’s sustained popularity.
“The secondary cycle is showing a lot more staying power than anyone anticipated,” he said.