Florida SBA to commit up to $2 bln to PE, eyes small and sector-focused funds

  • Assets Under Management: $152.2 bln
  • PE Portfolio: $12.9 bln
  • PE target allocation: 6 pct
  • PE actual allocation: 6.9 pct
  • PE return: 19.2 pct over one year, 13 pct since inception
  • Whom to contact: John.Kuczwanski@sbafla.com
  • Why this is important: The LP is looking to increase commitments to smaller buyouts

Florida State Board of Administration will commit up to $2 billion to private equity this year as it continues to focus on smaller buyouts and sector-focused funds.

The $152.2 billion pension fund also is building up its portfolio in Europe and Asia.

“Our emphasis on portfolio construction has allowed us to build a concentrated portfolio and focus our efforts on sourcing and gaining meaningful allocation to top GPs,” said John Bradley, senior investment officer in PE at Florida SBA.

Portfolio shift

Florida SBA’s $12.9 billion PE portfolio construction has shifted in the past five years, pension documents show.

The pension fund had 16 large and seven small buyout funds in its PE portfolio at the end of June 2011. By 2017, the PE portfolio had seven large and 14 small buyout GPs.

“Our shift down market has produced a portfolio with greater diversification by strategy and size,” Bradley said.

“We feel we are better positioned today to capture upside and produce outsized returns.”

There’s room for at least four new relationships in small buyout funds, documents said.

“We try to get in early and build relationships with top teams over three to four years,” Bradley said. Florida SBA also prefers to meet new managers outside the fundraising process to assess their fit in the portfolio, he said.

But increasing fund sizes can be a cause for concern, Bradley said. That can mean the GP is going off strategy. In such a situation, the PE team will reassess its commitment to the new fund, he said.

Florida SBA’s private equity portfolio includes buyouts, growth equity, distressed, co-investments and secondaries.

Florida SBA’s PE program has 68 GP relationships across 184 funds. Of these 48 GPs are core, ongoing relationships, Bradley said.

While most commitments are re-ups, “we are looking to establish another two to seven new relationships,” Bradley said.

Its actual private equity allocation is 6.9 percent against a target allocation of 6 percent.

Buyouts, including co-investments, account for two-thirds (66 percent) of the private equity portfolio, venture capital is 16 percent, distressed is 12 percent and secondaries are 6 percent.

Large funds represent 30 percent of allocation in the PE buyout portfolio, mid-market funds are 35 percent and small-market funds are 35 percent, Bradley said.

More than 70 percent of Florida SBA’s buyouts commitments are to sector-focused PE firms.

These include Silver Lake in large buyouts, Thoma Bravo, ABRY Partners, Denham Capital, EnCap Investments, FS Equity Partners, Siris Capital and Stone Point in middle markets, and Accel-KKR, Carnelian Energy Capital, Cressey & Co, Francisco Partners, Post Oak Energy Capital and Rubicon Technology Partners in small buyouts.

“Our preference for sector-focused funds has allowed us to better control and manage our geographic and sector exposures,” Bradley said.

“Our aim is to build a concentrated portfolio of GPs with complementary exposures and strategies that reflect our view of the market and future return expectations.”

Non-U.S. strategy 

Florida SBA’s non-U.S strategy is focused on regional GPs, Bradley said. The non-U.S. allocation decreased in 2014 when the pension fund sold some of its European portfolio on the secondary market, he said.

For starters, the pension fund is committing to managers with a Europe focus, like CVC Capital Partners, Investindustrial and Waterland Private Equity Investments.

And next will be Asia, possibly Japan and South Korea, Bradley said. The private equity portfolio already has significant exposure to China, he said.

Lexington Partners is the largest GP relationship in the portfolio and represents 10 percent of the PE portfolio, pension documents show.

The other big GP relationships are with Thoma Bravo, Hellman & Friedman, Ares Management and TrueBridge Ventures, Bradley said.

The pension fund also looks at emerging managers for its PE portfolio. It recently invested in LightBay Capital, founded by ex-Ares partners, “who we have known for a number of years and were very familiar with their performance at their prior firm,” Bradley said.

It also invested in Rubicon Technology Partners, a sector-focused manager “with deep domain expertise,” Bradley said.

The pension fund’s private equity portfolio has delivered strong results. It returned 19.2 percent over one year, 14.5 percent over three years and 15.9 percent over five years as of Dec. 31, 2017.

The PE portfolio has returned 13 percent since its inception.

Venturing forth

Going forward, the pension fund is also looking to increase its commitments to early- and expansion-stage companies, Bradley said.

The pension fund invests in venture capital through its four single account and fund-of-funds relationships with TrueBridge, Silicon Valley Bank, Fairview Capital and Tiger Iron Capital.

The VC portfolio has returned 13.1 percent over one year, 10.2 percent over three years and 15.2 percent over five years, as of Dec. 31, 2017.

Action Item: Read more on Florida SBA’s PE portfolio here https://bit.ly/2Ler0M5