Arizona pension eyes big cuts to GP roster and a ramp-up in co-investing

Arizona State Retirement System could commit up to 30 percent of its annual private equity commitments to co-investments in 2023 through a separately managed account.

Many LPs have focused on co-investments to reduce fees while also boosting returns. The $48.2 billion Arizona system finds itself in a good position to embark on a co-investment heavy approach as its private equity portfolio has been cashflow-positive for six of the past seven years.

“We’re engaging consultants in the due diligence needed for an SMA on co-investments,” said Arizona’s deputy chief investment officer Samer Ghaddar at the system’s investment committee meeting March 16. Buyouts watched a broadcast of the meeting.

An SMA for co-investments would help the staff navigate the workload needed to engage in co-investing, Ghaddar said.

“It takes so much work, but you usually only have between five days or two weeks to make an allocation commitment,” Ghaddar said.

According to Ghaddar, the system could potentially put between 25 and 30 percent of its planned $1.35 billion in private equity commitments in toward co-investments in 2023. Last year, the system made $1.355 billion in commitments to 17 funds, including one co-investment, Ghaddar said.

Arizona also is focusing on reducing the number of managers it works with in the years ahead, Ghaddar said. The system currently works with more than 90 managers, a number Ghaddar said the system plans on trimming to between 40 and 45.

The system will only re-up with top performing managers in the next year to reduce this number, Ghaddar said.

According to Ghaddar, the strategies that have performed best for the system’s private equity portfolio are small buyouts, late-stage venture/early growth and middle-market buyouts. The worst performing managers have been mezzanine, energy and mega-buyout funds.

“We try not to invest in bigger funds,” Ghaddar said.