LPs

Arizona pension to reduce PE pace

The system is like many other LPs who have reduced pacing schedules due to overallocation to the asset class.

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Arizona State Retirement System will allocate up to $900 million to private equity next year, a $450 million reduction from its total commitments in 2023.

Arizona is like many other LPs who have reduced pacing schedules due to overallocation to the asset class. The system’s investment staff is also bullish on 2024 vintage year and does not want to miss out on potentially strong returns.

The $50.7 billion system discussed its private equity pacing plan at its December 13 meeting. Buyouts watched a broadcast of the meeting.

According to board documents, the system currently allocates 13.4 percent of its total fund to private equity, above its 10 percent target and slightly above the upper band of its policy range.

“We have to take advantage of what we’re seeing in 2023 and 2024 vintages. We believe they will be great years as valuations have corrected and we want to stay in the market,” said deputy CIO Samer Ghaddar.

The $900 million in planned commitments should bring the actual allocation to private equity to 11 percent by the end of 2025 and 10 percent by 2026, according to Ghaddar.

According to the presentation, Arizona has started to shift the makeup of its private equity portfolio.

The system is looking to reduce the number of managers in its portfolio to between 40 and 45, the presentation said. Arizona also looks to place 30 percent of its private equity commitments to co-investments in 2024 through a SMA with JP Morgan, Ghaddar said.

In 2023, the system made 14 commitments, 10 of which were re-ups, according to the presentation.

Over 34 percent of its commitments were with middle market funds, the presentation said.

“Our sweet spot is in the middle market. That’s where we’re good and that’s what our managers are good at,” Ghaddar said.

Ghaddar also said the system has seen an uptick in distributions in the fourth quarter of 2023 and expects to see more in 2024, despite a challenged exit market.

According to Ghaddar, pressure from investors and debt maturities will cause GPs to initiate the sales of their portfolios and return distributions to LPs next year.

“We see a lot of innovation coming from GPs,” Ghaddar said.