Arizona pension CIO anticipates stronger exit activity in second half

'Banks are coming back to underwriting big transactions,' the system’s deputy CIO told investment committee members.

Arizona State Retirement System believes exit activity will rebound in the second half of the year, which will result in the pension earning positive cashflow in 2024.

Exit activity has struggled in the higher rate environment, as GPs look for ways to deliver proceeds back to LPs in older funds. With slower cash flows from private equity portfolios, many LPs have had to reduce the amount they commit to the asset class to account for lighter liquidity loads.

Arizona discussed its private equity outlook at its March investment committee and full board meetings, both of which were watched by Buyouts.

According to deputy CIO Samer Ghaddar, the exit-to-investment ratio, which compares the number of exits versus the total number of investments, has reached its bottom, signaling a boost in M&A activity.

Buyout activity began sticking upward in early 2023, fueled by an improving credit market, Ghaddar said.

“Banks are coming back to underwriting big transactions. These transactions are selective, but banks are lending to big names for investments with lower debt ratios,” Ghaddar said at the system’s March investment committee meeting.

Ghaddar added that managers are writing larger equity checks for their investments.

“That makes us more comfortable that these assets are less leveraged,” Ghaddar said.

The system’s private equity program was created in 2007. According to board documents, the portfolio has been cashflow positive in six of the past eight years.

“We expect 2024 to be a positive cashflow year and will continue to be so going forward,” said Arizona CIO Michael Viteri at the system’s March 27 board meeting.