Rhode Island charges ahead with new secondaries strategy

Less than six months since it decided to begin acquiring stakes on the secondaries market, Rhode Island State Investment Commission has invested $65 million across three transactions.

It has appetite for more, and could potentially commit up to $130 million to secondaries this year as it aims to build its exposure to the sub-asset class up to around 20 percent of its $624 million private equity portfolio this year, according to spokesman Evan England.

Rhode Island invested $40 million in stakes in older Industry Ventures and Paine Schwartz Partners funds, according to 2 October state investment commission documents. It committed $25 million for a stake in Eureka Equity Partners’ Fund III in May.

The pension system will take an opportunistic approach, investing in LP interests in both new and existing funds with its GPs, as well as the funds of GPs with which it does not have relationships, senior investment officer Jonathan Popielarski told sister publication Private Equity International.

Acquiring stakes on the secondaries market is the latest method Rhode Island has adopted to expand its private equity portfolio. The pension, which has invested in private equity since 1989, has previously invested in commingled secondaries funds.

Rhode Island’s private growth exposure, under which private equity falls, is 7.2 percent against a 11.25 percent target, as of 31 July, according to a state investment commission report.

The pension system has an annual investment pacing target of $285 million and writes cheques of between $30 million and $50 million.

As Rhode Island does not co-invest alongside its managers – a strategy LPs often use to build stronger relationships – it is hoping an increase in secondaries activity could do the same job.

“If we are invested [with] GPs in their Funds III and IV, there might be an opportunity to increase exposure in their Funds II and I, and it can make us interesting [partners] for new primary commitments,” Popielarski told PEI.

Secondaries commitments

Rhode Island offered $10 million for an unknown seller’s interest in Industry Ventures Partnership Holdings Fund IV. The vehicle, which closed in 2016, focuses on primary commitments and early secondary purchases in small venture funds. The offer was accepted, according to a memo on Rhode Island’s website.

Rhode Island has previously invested with Industry Ventures. In 2014, the board committed $25 million to Fund III and $15 million to a Fund III co-investment. This was followed by a $10 million commitment to Fund IV in 2015 and a $30 million commitment to Fund V in February 2018, England said. That fund closed with $335 million in total commitments in June 2018.

Rhode Island also bought an LP’s entire stake in Paine Schwartz’ Food Chain Fund IV, valued at $30 million. The fund invests in the food and agriculture industry, England said. Fund IV closed with $893 million in December 2014, sister title Buyouts reported. The system committed $50 million to Fund V in 2018.

“The Fund has called 75 percent of commitments and completed eight investments over a four-year period,” Cliffwater CFA and senior managing director Thomas Lynch wrote to the board in a memo, referring to Fund V. Fund IV is beyond its investment period and uncalled capital will be used for fees and add-ons, according to Lynch.

As of 31 March, Paine Schwartz Food Chain IV was generating a 11.10 percent net internal rate of return and a 1.27 net multiple, Buyouts reported.

Rhode Island bought a $25 million stake in Eureka’s Fund III, a 2012-vintage US buyout fund, from an unnamed insurance company, state investment commission documents for 20 May said. The fund had made six investments and completed two exits which generated 5.2 times invested capital in aggregate. The remaining four investments were valued at 1.9 times total cost, and two were expected to be sold by year end.

Rhode Island’s purchase of the Eureka Fund III stake would yield an expected internal rate of return of 16 percent and a TVPI of 2.02x, the May documents said.