Arizona pension to consider co-investments with managers outside its portfolio

Arizona State Retirement System may use managers it does not currently partner with as it builds out its co-investment program.

LPs have focused on co-investments as a way to get direct exposure into private investments while paying less in fees compared with fund commitments. But most LPs prefer to work with managers they know well as opposed to investing alongside unfamiliar GPs.

Arizona discussed its co-investment and private equity strategy at the system’s October 4 investment committee meeting. Buyouts watched a broadcast of the meeting.

Earlier this year, Arizona announced plans to place 30 percent of its private equity portfolio in co-investments.

According to deputy chief investment officer Samer Ghaddar, the $51.5 billion system expects to reach the 30 percent co-investment goal by 2027.

The decision to potentially co-invest with GPs outside the portfolio will help the system diversify its private equity exposure, according to investment staff.

“We’ll have more diversified co-investment opportunities this way rather than us just doubling down on what our existing GPs come to us with,” said Arizona’s chief investment officer Michael Viteri.

Arizona allocates 12.8 percent of its total fund to private equity, above its 10 percent target. Ghaddar said the system expects to reach the target allocation by the end of 2024 or early 2025.

To date, Arizona has committed $1.02 billion to private equity this year, according to Ghaddar. The system has another $330 million it can still deploy through the end of the year.

Arizona’s private equity portfolio remains cashflow positive despite the difficult exit environment, Ghaddar said.

Rising interest rates impacting commercial bank lending and leveraged loan financing have been the primary contributor to the sluggish exit market, Ghaddar said.

Ghaddar said company founders have shown a “bit of stubbornness” adjusting valuations, which has kept them from selling their companies.

“If a founder sees the S&P is down by 20 percent, that does not mean he or she is going to sell their company at a 20 percent discount. It takes a long time for founders to understand their valuations and it slows down activity,” Ghaddar said.