The private equity secondary market is readying itself for what could be a defining moment. One of the private equity world’s most active limited partners, the California Public Employees’ Retirement System (CalPERS), is considering a sell-off of private equity partnerships to the tune of about $3 billion. Such a large amount of assets going on sale would get secondary buyers vying for pieces of the portfolio and may encourage other large LPs to follow suit.
At the end of March, CalPERS issued two requests for information (RFI). One RFI asks interested groups to submit plans for managing partnerships in its portfolio. The other RFI asks for respondents to submit plans to help create new investment vehicles. Both plans would serve CalPERS’ $28 billion Alternative Investment Management (AIM) program.
The CalPERS Investment Committee approved a proposed action plan at its Dec. 12 meeting to overhaul the structure and management of the AIM program. The plan calls for the $200 billion pension system to reduce the number of private equity relationships it manages and realign its management structure.
While the RFIs released by the pension system do not explicitly state that it will sell private equity assets on the secondary market, many agree that secondary sales will most likely be a significant part of its restructuring.
“CalPERS is sort of a bellwether,” says a partner with one of the secondary market’s large established firms. “More people look to CalPERS than look to other public pension funds as a barometer. This could be a catalyst for massive transaction opportunities.”
CalPERS plans to sell about $3 billion in assets: $2 billion in invested partnerships and $1 billion in unfunded commitments. As last September 2005, the pension system had 412 active funds being managed by more than 100 general partnerships.
CalPERS will essentially divide its alternative assets portfolio into five parts. Its core portfolio will consist of approximately 20 to 30 private equity firm relationships. It will also have a prospective core portfolio of between 30 and 40 new relationships, a more developed co-investment portfolio, and a portfolio of “discretionary vehicles” comprised of third-party managers making smaller investments.
The fifth part of the revamped CalPERS AIM structure would be a legacy portfolio that would consist of “non-core relationships, underperforming management teams, and retiring relationships.” It is this legacy portfolio that presents the greatest opportunity to secondary buyers, and CalPERS intends for it to be managed by a third party. It has set out to “retire” funds that are under performing and “explore opportunities to sell investments in the secondary market” over the next three years.
CalPERS is a limited partner for large secondary firms likely to be in the best competitive position in the sale, including Coller Capital, Lexington Partners and Landmark Partners.
A CalPERS spokesman says that while there’s no timeline for signing contracts since negotiations can take weeks or months, the target will have the third party manager(s) in place by the fall. —Matthew Sheahan
Ohio looks to unload private equity holdings
Confronted with a disclosure controversy, the Ohio Bureau of Workers’ Compensation (OBWC) has taken steps to sell its private equity portfolio on the secondary market, according to several reports.
The CalPERS Investment Committee approved a proposed action plan at its Dec. 12 meeting to overhaul the structure and management of the AIM program. The plan calls FOR CalPERS to reduce the number of private equity relationships it manages and realign its management structure.”
OBWC, which holds approximately $16 billion in assets, plans to issue a request for information (RFI) regarding selling its private equity holdings on the secondary market. OBWC’s private equity commitments stand at more than $800 million, with about half of those being invested. The current market value of the assets given was $366 million.
OBWC ran afoul of many GPs when it threatened to release a report that includes portfolio company valuations and methodology notes for its 68 private equity funds (see March 2006 VCJ). The report was prompted by an ongoing Ohio political scandal known as “Coingate,” in which OBWC money was lost in a rare coins scheme. One result—in addition to resignations and potential prison sentences—was that OBWC retained Chicago advisory firm Ennis Knupp & Associates to formally review the valuations of all OBWC private equity funds.
At the same time, the bureau began an effort to streamline its costs and is currently the subject of a study by advisor Wilshire Associates. The results of that study are due in June, but at least one official has said OBWC lacks sufficient staff to properly manage a large private equity portfolio.
OBWC GPs include Carlyle Group, Castle Harlan, HarbourVest Partners, Lexington Partners, Invesco Private Capital, Pharos Capital, Primus Venture Partners, TCW/Crescent Mezzanine, Thayer Capital Partners and Wind Point Partners.
If OBWC enters the secondary market, it may join the California Public Employees’ Retirement System (CalPERS), which is considering a sell-off of private equity partnerships to tune of about $3 billion. Such a large amount of assets going on sale would send secondary buyers vying for pieces of the portfolio and may encourage other large LPs to follow suit. — Dan Primack & Matthew Sheahan
New Paul Capital fund to seek upwards of $1B
Paul Capital Partners may be the next group with a dedicated secondary vehicle to join the fund-raising juggernaut currently rolling through the private equity world. The firm is investing its eighth dedicated secondary fund at a faster pace than expected and could potentially begin marketing its ninth secondary effort by this summer.
The firm’s current dedicated secondary fund, the $960 million Paul Capital Partners VIII, is approximately 65% invested. The firm expects to be 75% invested sometime over this summer and anticipates marketing Paul Capital Partners IX around that time, according to a source familiar with the firm. While Paul Capital has not set an official target, it will likely be similar in size to Paul VIII and may exceed $1 billion.
Paul Capital Partners plans to stay in the middle-market with deals of between $25 million and $35 million. Paul Capital is largely sector and geographically agnostic, buying shares in buyout, mezzanine, venture capital and portfolios of direct interests in private companies. Most of the firm’s deals have been in North America and Europe.
Limited partners in past Paul Capital funds include BancBoston Investments, BP Pension Fund, the U.K.-based Coal Pension Securities Trust, the CPP Investment Board (CPPIB), E.I. du Pont de Nemours & Co. and the Howard Hughes Medical Institute, among others. —Matthew Sheahan
AlpInvest, AXA back spinout of WestLB
The private equity groups of large financial institutions continue to seek their independence and have a staunch ally in a secondary market that is flush with cash. WestLB’s London-based private equity arm, West Private Equity, is the latest captive group to spin out, enlisting the help of secondary investors AlpInvest Partners and AXA Private Equity.
OBWC plans to issue a request for information regarding selling its private equity holdings on the secondary market. OBWC’s PE commitments stand at more than $800 million. The current market value of the assets given was $366 million.”
AlpInvest and AXA purchased the investments, future commitments and LP shares of West Private Equity Fund 2000 (WPE 2000) from WestLB. In the same deal, the investors helped the West Private Equity (WPE) partners purchase the management company and also committed capital for a fund that WPE will raise later this year. The deal is valued at more than €100 million ($123 million).
Both sides reached an agreement in December and announced the closing April 18. Neither WPE nor AlpInvest would provide specifics about the transaction.
WPE, which will be renamed Lyceum Capital, has already been operating more or less independently. WestLB initially funded the buyout arm with €140 million in 1999, but the firm raised additional capital from limited partners and eventually closed on €300 million. West Private Equity’s LPs are mix of U.S. and European institutional investors that remain in WPE 2000.
The spinout was expected. The partners knew from the group’s inception that it would eventually seek to become more independent, according to CEO Philip Buscombe. “When we raised the original fund we were sponsored by WestLB and then raised the majority of the fund from outside investors,” Buscombe said. “We understood that for our second fund we would need to be more independent. That’s what’s been done with this transaction.” —Matthew Sheahan
Goldman, CPPIB lead $925M purchase
The Goldman Sachs Asset Management private equity group and the Canadian Pension Plan Investment Board (CPPIB) agreed to purchase a $925 million private equity fund share from JPMorgan Partners in April.
The two private equity firms teamed up with other investors, including Paul Capital Partners, to buy the large interest in JPMorgan Partners Global Fund (JPMP Global Fund). The other investors were not disclosed, but they include endowments, foundations and pension funds that invested a relatively small amount in the transaction.
CPPIB invested more than $300 million for a 35% stake in the assets. It had previously invested $174 million in the fund as a primary LP. Goldman Sachs provided the largest share of the purchase using capital from several of its funds. Paul Capital Partners’ investment was relatively small by comparison, according to people familiar with the transaction.
The deal was an exclusively negotiated transaction after Goldman Sachs approached the partners of the JPMorgan private equity group with the intent to buy a stake in the fund. JPMorgan Partners, the private equity unit of JPMorgan Chase & Co., is spinning out to form the independent CCMP Capital. The current general partners will continue to manage the portfolio assets.
“These types of deals don’t come along that often,” says Mark Wiseman, CCPIB vice president for private equity investments. “It shows that we can create a win-win situation. I hope it’s the case that more transaction like this can be done.”
JPMP Global Fund is a vintage 2001 fund that raised $6.3 billion, according to Thomson Financial (publisher of VCJ). It is a buyout and growth equity fund with 91 portfolio companies. Companies in the portfolio include Brand Services, a Chesterfield, Mo.-based scaffolding equipment supplier; Sidney, Neb.-based Cabela’s, which markets supplies for camping, fishing, hunting and other outdoor recreation; Safety-Kleen Europe, a Middlesex, U.K.-based provider of environmental waste cleanup services and Spanish telecom provider Grupo Ono.