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Michigan aims to boost exposure to mezz

  • Mezzanine debt “attractive” in current cycle, according to Michigan staff
  • Michigan staff sees co-investment activities in mezzanine strategies
  • $60 bln retirement system commits more than $750 mln to PE, VC

Michigan’s $60 billion public retirement system will likely boost its exposure to credit-related private equity strategies over the next three to six months, according to its quarterly investment report.

State of Michigan Retirement Systems staff is currently reviewing “several opportunities” in credit-related PE, including mezzanine funds, a staff memo included in the report said.

“Mezzanine debt is attractive, particularly in the current cycle, because of low issuance of leveraged-loan and high-yield debt, attractive coupon rates, low default rates [and] potential for equity upside,” the memo said. Mezzanine funds also hold potential co-investment opportunities, Michigan staff wrote.

A spokesman for Michigan did not respond to a request for comment.

About 1.6 percent of Michigan’s $9.6 billion PE portfolio is in mezzanine-related strategies, according to the report. Holdings include stakes in mezzanine funds managed by firms like Carlyle GroupCrescent Capital Group and HarbourVest Partners. Michigan’s mezzanine portfolio delivered a 10-year cash-weighted return of 8.4 percent through Dec. 31, the report said.

In addition to the glimpse at its staff’s current investment focus, Michigan’s report disclosed the system’s first-quarter PE commitments. Michigan committed more than $750 million to private equity and venture-capital funds in Q1, including $250 million to Advent International’s most recent $13 billion flagship fund.

The retirement system also committed $200 million each to Berkshire Partners’ Berkshire Fund IX, which closed on $5.5 billion in March, and Leonard Green & Partners’ new $9.6 billion flagship fund.

Michigan’s final buyout commitment, for $75 million, went to Vista Equity Partners Fund VI. Vista Equity Partners set an $8 billion target and $10 billion hard cap for Fund VI.

Michigan also committed $37.5 million across three VC funds managed by Accel Partners, according to the report. The retirement system committed $22 million to Accel Growth IV, $10 million to Accel XIII and $5.5 million to Accel Leaders Fund.

Michigan devoted 11 percent of its private equity portfolio to investments in venture capital funds.

State of Michigan Retirement Systems held 16 percent of its assets in PE as of March 31, the report said. The retirement system was one percentage point short of its 17 percent target allocation for the asset class as of that date.

Action Item: Michigan’s most recent investment report:  http://1.usa.gov/28JvPWN