Why more pension funds aren’t secondaries buyers

There are many challenges to US pension plans becoming more active buyers in the secondaries market, but it's the full pricing that's really holding them back.

Last week we reported that the Virginia Retirement System (VRS) purchased a stake in a Deutsche Asset and Wealth Management’s European infrastructure fund alongside with Pantheon and SL Capital. Earlier this year, the State of Hawaii Employees’ Retirement System bought stakes in Abraaj Group’s funds through its discretionary advisor Hamilton Lane.

So, while more US pensions seem to be waking up to the advantages of building a buy-side presence, sources say it’s not always straightforward.

Many pensions’ investment decisions have to be approved by a full board and sometimes also by their consultants, which can slow down the process if a board only meets monthly or quarterly. In a secondaries market where the transfer of an LP fund stake can be completed in a matter of weeks, pension fund buyers may find themselves at a disadvantage.

Likewise, they may not have enough staff to properly analyse a potential acquisition that they have not already looked at as a primary investment. “They can do due diligence on the GP, on its track record, but they’re not experienced in looking at the underlying portfolio,” one advisor said, noting that there were some exceptions such as VRS.

There are ways to get around these obstacles and pensions determined to buy strategic assets still have several options. They can cultivate relationships with secondaries firms and ask to co-invest on specific deals. They can take the passive route, like Hawaii Employees’ Retirement System, and buy secondaries through private equity consultants.

Another common tactic is to get on the radar of advisory firms to make sure they don’t miss what they’re looking for. Most advisory firms don’t show every deal to pensions but they know which ones are typical buyers and what they’re looking for, so they may show them transactions on a selective basis.

“On rare occasions, pension funds are on the lookout for a specific fund,” said one advisor. “I know what’s in their portfolio.”

However, the main challenge today for pension funds that have been active or have become open to purchasing LP interests is simply high pricing, with average buyout trades going for 95 percent of net asset volume in the first half of the year, according to Greenhill Cogent data.

“Most pension funds see the market as frothy,” the advisor told me, adding that a turn in the economic cycle will likely open the doors to softer pricing and to more pension funds becoming buyers of secondaries. “Prices are still relatively high but some groups may become more active in the downturn if they see lower prices.”

Have you seen more pension plans active as buyers in the secondaries market this year? Tell us by writing to marine.c@peimedia.com. Your comments will remain anonymous.