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Washington State gears up for first secondaries sale

Secondaries pricing has become uncertain, with inflation, supply chain disruptions, geopolitical turmoil and rising interest rates causing public market volatility since the beginning of the year.

Washington State Investment Board, one of the oldest limited partners in the industry, has long avoided selling private equity fund stakes on the secondaries market.

That will likely change this year as the system gears up to run its first ever formal secondaries sale. The system hired Evercore to help it organise what is expected to be a sale of around $1.5 billion to $2 billion in PE fund stakes, three sources told affiliate title Buyouts.

Avoiding selling on the secondaries market was for many years considered the mark of a loyal LP, who would stick with their GPs through good times and bad. Selling out of a relationship was viewed almost as a betrayal of that relationship and LPs feared being stigmatised as a capricious partner.

Those principles have gradually changed, to the point where these days, an LP institution that refuses to explore secondaries as a form of portfolio management is seen as losing out on maximising the value of its investments.

“WSIB believes that secondary market activity has become a mainstream portfolio management tool in private equity, and is assessing the desirability of utilising it alongside other portfolio management tools at its disposal,” according to a statement from the system shared by spokesperson Chris Phillips. Phillips declined to comment further about the potential sale.

Washington State’s private equity portfolio had a market value of about $42.9 billion as of 31 December, according to the system’s most recent quarterly report. The board invests for 38 funds, including 17 retirement funds, five state insurance funds for injured workers, seven permanent funds and nine other funds, the quarterly report said.

Private equity accounts for 27.5 percent of WSIB’s total portfolio of about $156 billion, the quarterly report said. Washington State’s portfolio has holdings dating back to the 1980s, mostly with KKR as well as venture capital firms such as Cable & Howse and John Hancock Venture Fund.

WSIB is not the only system holding its first secondaries sale. Houston Firefighters’ Relief and Retirement Fund also is offloading a portfolio of stakes in private equity funds for the first time, valued at about $300 million, Buyouts recently reported.

“The sale will only be completed if offers are attractive and the final amount may be more or less than $300 million,” Houston Firefighters’ CIO Ajit Singh said through a spokesperson at the time.

Pricing will be a consideration in Washington State’s sale as well. Pricing has become uncertain in the current environment, with inflation, supply chain disruptions, geopolitical turmoil and rising interest rates causing a cycle of public market volatility since the beginning of the year.

To some extent, certain buyers can ignore pricing if they have close knowledge of the funds in an LP portfolio, with a view to underlying assets. In these cases, the buyers can determine pricing despite market swings.

LP portfolio sales have come back in a big way since last year, with chunky portfolios leading the way. The California Public Employees’ Retirement System has been selling up to $6 billion of its private equity portfolio in its first major secondary sale. Lexington Partners was expected to buy about one-third of that portfolio, Buyouts previously reported.

Other LP sellers included CPPIB, Kaiser Permanente, NY State Teachers’ Retirement System and Teachers Retirement System of Illinois.

In 2021, GP-led secondaries deals such as single-asset continuation funds represented about 52 percent of the $132 billion in total estimated activity, according to Jefferies full-year secondaries volume report, published this week. Traditional LP volume was $64 billion in 2021, representing a 156 percent increase from 2020, Jefferies said.

– This report was originally published on affiliate title Buyouts.