MassPRIM staff says PE portfolio will become “net buyer” instead of “net seller”

Massachusetts Pension Reserves Investment Management Board‘s private equity program has weathered the crisis stemming from the coronavirus pandemic well, but faces a transition in coming months.

“We expect deal pacing and deal activity to decrease and capital calls for new deals to go down, but also selling to go down, and we see the portfolio being a net buyer of companies when the markets pick back up, reversing from a net seller,” Michael Bailey, a MassPRIM senior investment officer and director of private equity, said at its investment committee meeting Tuesday.

MassPRIM was on track to approve $560 million in commitments, which would put it more than halfway toward its goal of committing $2 billion to private equity in 2020, Bailey said. It committed $739 million so far, according to meeting documents.

“We’re optimistic that these new commitments, when we add it to the dry powder we’ve already got sitting on the sidelines, [are] going to be used in a deal environment that is being re-priced to earn better returns on a risk-adjusted basis than this environment that we just emerged from, where pricing was very high,” Bailey said. “The new deals will be put to work in an environment that prices risk more appropriately for buyers.”

For the first time in over a year, the $9.1 billion portfolio contributed more than it received in distributions from its private equity managers. In the first quarter of 2020, MassPRIM’s PE program contributed $405.9 million and received distributions totaling $283.4 million, according to meeting materials.

In Q4 2019, it contributed $481.6 million and received distributions of $482.3 million. For 2019 overall, contributions were $966.3 million and distributions $1.36 billion.

As of March 31, the portfolio’s net internal rate of return since inception was 13.56 percent. Its one-year returns, gross of fees, were 21.2 percent, leading all asset classes. The total fund return was -1.2 percent, also gross of fees.

Due to the lag in private equity valuation, MassPRIM’s private equity portfolio grew to take up 13 percent of its assets in Q1, 2020. Bailey said that was within its policy allocation, but would also likely change.

“We expect the exposure to come down a bit as these private equity valuations catch up to the conditions,” Bailey said. “We expect the markdowns to begin to ease the exposure in Q2 and Q3.”

On March 23, it approved a $25 million commitment to Flagship Pioneering‘s Origination Fund VII. That fund closed in April on $1.1 billion, according to the firm’s website. Flagship focuses on life sciences, and this pool will focus on “human health and sustainability companies.”

MassPRIM is closely monitoring how the portfolio companies of its private equity managers are faring during the crisis. At the last board meeting on April 22, Bailey provided a breakdown of how the companies were faring in the crisis, color-coded green, yellow and red, with red being the most troubled companies. Of those companies, 55 percent were green, 30 percent were yellow and 15 percent were red.

“We’re doing a deeper dive on the red companies, obviously, spending more time on those, the risks underlying those companies, so we’ll have some more to say about that,” Bailey told the board.

Action Item: read the materials for MassPRIM’s May 5 investment committee meeting here.

CORRECTION: A previous version of this story misidentified the meeting at which these remarks were made. It was the MassPRIM investment committee meeting, not the board of trustees meeting. The story has been updated.