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Arizona bullish on mid-market GPs

  • Arizona to focus on GPs with “strong operational” capabilities
  • $32.9 bln pension likes energy, tech, healthcare sectors
  • Arizona has 8 pct allocation to PE

The Arizona State Retirement System plans to focus its commitments on U.S. middle-market buyout funds managed by general partners with “strong operational capability,” according to an October report about the “house views” of investment staff.

The $32.9 billion retirement system plans to consider managers operating in the energy, healthcare and technology sectors, while reducing its emphasis on large buyout funds, staff wrote. The pension will also track distressed opportunities in Europe.

Arizona’s $2.6 billion private equity portfolio included approximately $615 million of commitments to energy funds and $255 million to technology-dedicated funds as of April, according to its most recent private equity investment report. The report also indicates Arizona is underweight in its exposure to Europe, emerging markets and venture capital, though it does not say by how much.

Arizona staffers did not respond to requests for comment.

While Arizona is generally optimistic about the U.S. economy, noting opportunities for private equity managers operating in the energy sector and the booming technology industry, it also tempered its enthusiasm with a few caveats.

The report notes general partners have roughly $100 billion more in dry powder than they did last year, while total deal volume has fallen. GPs had completed just 1,595 deals through the first half of 2015, putting the industry on track for 3,190 deals this year, well off the pace from 3,648 completed deals in 2014.

Deal pacing fell even more during the third quarter, when U.S. sponsor-backed M&A volume fell to $11.4 billion, roughly $17.2 billion less than Q3 2014, according to Thomson Reuters. The IPO market also softened from last year, complicating private equity managers’ path to exiting their investments, Arizona staff wrote.

Arizona had an 8 percent allocation to private equity as of September 30, which is in line with its target for the asset class. The retirement system is expected to release its 2016 private equity plan at some point during the fourth quarter.

Action Item: See Arizona’s investment management house views here: http://bit.ly/1GG6Q65.

Action Item: See Arizona’s most recent report on its PE portfolio here: http://bit.ly/1MQKDPD