Overexposed Michigan, slowing on PE, pulls back on secondary

Michigan’s large state retirement system, which has been dialling back on private equity amid overexposure issues, put a portfolio of private equity fund stakes to bid, but pulled back after pricing came in too low, sources affiliate title told Buyouts.

The process is an example of the kind of challenges faced by secondaries participants, with pricing discrepancies continuing to prevent sales from making it to final close. While pricing has increased since late last year, LPs generally are reluctant to sell at prices under the mid-80s percent of net asset value.

Michigan took its portfolio, which was said to be valued at $1 billion-plus, to the market with Jefferies as adviser and received bidding, a system spokesperson confirmed. “We decided against the sale in the end,” the spokesperson said.

While declining to comment on why the system pulled back on the sale, many large systems use potential sales as a way to test pricing. When bids come in low, they pull back and wait to sell once pricing recovers.

Secondaries price testing can cause consternation among agents and buyers lined up for the sale. However, it’s becoming more common in today’s market, which may remove some of the stigma.

“There’s way more market testing that goes on than would even be publicly announced,” said an LP consultant.

It’s also been the case that systems that have pulled processes come back once markets improve to try again. The spokesperson declined to comment about whether the system will make another sales attempt in the future.

Caisse de dépôt et placement du Québec, working with Evercore, pulled a portfolio sale last year, but brought it back to market recently, Buyouts reported. The system in the new sale is selling partial stakes in a selection of high quality funds.

Michigan’s actual allocation to private equity hovered around 23.5 percent of the total fund, well above its target of 16 percent, but still within the high point of its range of 13-27 percent, Buyouts reported earlier this month.

Private equity is the Michigan system’s largest asset class. Because of overallocation and slowing distributions from the PE portfolio, the system plans on only making re-ups to existing managers over the next 12 months, Buyouts reported recently.

Pricing on LP portfolios hovered at a medium high bid of 80 percent across all strategies, similar to last year, according to Greenhill & Co’s first-half volume report. Buyout pricing slipped slightly in the first half to 83 percent of NAV, from 84 percent last year, the report said. LP sales accounted for around $27 billion of total first-half volume of $44 billion, Greenhill said.

“We expect pricing for buyout funds to improve moderately (which was already partially observed in Q2 vs Q1 2023) as the valuation gap between public and private markets closes, and falling inflation leads to an easing of monetary policy,” the report said.