Oregon Public Employees Retirement Fund has warned that the “aggressive” behaviour of some secondaries market participants is leading to a breakdown in GP-LP alignment.
“As the secondary market is growing and maturing rapidly, we are increasingly seeing innovative but complex and conflict-riddled transaction proposals,” the $75.1 billion US pension noted in a 31 January presentation outlining its private equity annual review and plan.
“We have been processing mature fund restructuring proposals for some time, but GPs, advisors and secondary players have become more aggressive over the past few years.”
The Salem-headquartered pension noted it had received proposals to restructure younger funds “in ways that start to break down GP-LP alignment.”
“While all of this has a place in a maturing private equity industry, the aggressive pace of innovation may suggest that secondary buyers have more appetite for deals than the current market can satisfy.”
Almost 30 percent of funds that traded last year were 2013-vintage or younger, according to Evercore’s latest annual report, which noted that GP-led deals accounted for around $20 billion, or 28 percent, of the $72 billion total deal volume.
GPs wishing to run secondaries processes on their younger funds need to prove to their LPs that there is a clear rationale for doing so, Andrew Sealey, chief executive at Campbell Lutyens, told Secondaries Investor.
“It has to be demonstrably good for the LPs,” Sealey said. “The bar is higher to prove that it’s actually in the interest of the majority of LPs.”
In recent years, GP-led processes have become more sensitive to LPs’ requirements by providing choices such as status quo options, he added.
Gabriel Boghossian, a partner at law firm Stephenson Harwood, said there is no fixed date after which fund restructurings can be justified, and that each case should be judged on specific facts.
“The basic tenet is that partners are fiduciaries – they must act for one another’s benefit and they must avoid making a personal profit at the partnership’s expense,” he said.
Funds OPERF has committed to since 2013 include the €2.1 billion TDR Capital III, the $5.1 billion Lone Star Fund VIII and the $4.1 billion Energy & Minerals Group Fund III, according to PEI data.
OPERF has relationships with around 40 private equity managers and has reduced its maximum commitment size to $500 million from $750 million, according to the presentation.
It plans to make as much as $3.5 billion in new commitments this year.
The pension’s private equity portfolio stood at $16 billion, or around 22 percent of its total portfolio, as of 30 June. The asset class delivered $1.1 billion in net distributions last year. Private equity underperformed the pension’s policy benchmark – the Russell 3000+3% – by 1 percent, the presentation noted.