University of California drastically cuts PE relationships

The University of California (UC) sold about $1 billion in private equity fund stakes in the past year at par, Jagdeep Singh Bachher, the chief investment officer and vice president of investments for the Regents, said at an investment board meeting last week.

UC had numerous investments of less than $5 million in size. In total, it has sold about 100 private equity fund investments worth about $1.7 billion in the past 30 months. At a headline level, the PE portfolio returned 22.6 percent for the year.

“Hundreds of private equity relationships for a very small team are simply not manageable,” he said, adding that it is an industry-wide problem and it isn’t specific to UC. “What it also does is that it elevates your cost structure. It gives you over diversification and you essentially get market return if you’re not careful.”

Other limited partners including California Public Employees’ Retirement System, the State of Wisconsin Investment Board and Harvard University have been active sellers on the secondaries to reduce the number of private equity relationships.

UC will work with a smaller core group of PE managers and, increasingly, co-invest alongside them. “What I’m looking for is an alignment of interests between us and the private equity funds,” he said.

Reasons for selling specific fund managers were diverse. In some instances, UC felt it had already realised the value of the underlying investments. In others, it sold prior to an anticipated fund restructuring.

In aggregate, the sales were done at par. While the first tranche it sold was done at a slight discount, the second tranche sold at a premium.

Bachher is responsible for managing the UC pension, endowment, short-term, and total-return investment pools, totaling about $98 billion. The endowment’s private equity portfolio is about $800 million.