Merced County pension feels the pinch of slowing PE exits

Merced County Employees’ Retirement System has seen cash flows from its private equity portfolio slowing as it contributed more to funds than it received in the third quarter.

The system reported private equity contributions outpacing distributions by $16 million in the third quarter of 2022 due to a slowing exit market.

The slowdown is pinching investors, many who also are battling overexposure to the asset class from the denominator effect. Slowing distributions leaves institutional investors with less capital overall to commit to new funds, which has led to an overall slowdown in private equity fundraising.

Cliffwater, Merced County’s adviser, reviewed the system’s private equity portfolio at its board meeting on March 23. Buyouts watched a broadcast of the meeting.

“The portfolio is diversified by strategy but overall, it is a negative cash flow situation,” Cliffwater noted in a presentation.

While distributions dried up, the $1.08 billion system’s private equity portfolio gained $11 million – or 4.3 percent – in value over the third quarter.

“We saw no dramatic markdowns in the quarter,” said Cliffwater senior managing director James Feidler.

Feidler said he expects fourth quarter valuations to come in around the same as the third.

“Fourth quarter results are notoriously lagged. But, by all accounts, we expect things to be relatively flat,” Feidler said.