Michigan bets heavily on megafunds in Q2

Despite a recent push to bulk up its holdings in middle-market buyout funds, State of Michigan Retirement Systems allocated the vast majority of its second-quarter commitments to large buyouts.

Michigan, which disclosed its commitments in materials for its Sept. 7 investment-advisory-committee meeting, opted to allocate more than 85 percent of its Q2 commitments to megafunds raised by Apollo Global Management, CVC Capital Partners, Kohlberg Kravis Roberts and Silver Lake. (See chart.)

State of Michigan Retirement Systems Q2 Commitments
Fund	Michigan Commitment	Fund Size
CVC Capital Partners VII	$150 mln	16 bln euros ($19.4 bln)
Apollo Investment Fund IX	$100 mln	$24.6 bln
KKR Asian Fund III	$100 mln	$9.3 bln
Silver Lake Partners V	$67.5 mln	$15 bln
Vista Equity Endeavor Fund I	$50 mln	$500 mln
Menlo Ventures XIV	$7 mln	$450 mln
Source: State of Michigan Retirement Systems

The heavy allocations to megafunds eschewed the $65.6 billion retirement system’s recent strategy to commit to more mid-market buyout funds in an attempt to diversify its exposure, according to memos prepared by investment staff.

“Concerns persist over record amounts of dry powder ($906 billion in private equity broadly and $563 billion in buyouts) and high entry prices for assets (10.5x EBITDA in U.S. buyouts),” Michigan staff wrote.

The investment memo also noted that almost two-thirds of the PE capital raised in the second quarter went to the 10 largest funds on the market.

Retirement system spokesman Ron Leix said Michigan plans to direct more commitments to middle market specialists over time, and that staff’s commentary on that subject isn’t specific to its strategy in Q2.

In addition to its megafund commitments, Michigan also committed $50 million to Vista Equity Partners’ $500 million Endeavor Fund, which will go toward investments in smaller enterprise software companies. Menlo Ventures’ new $450 million early-stage investment fund includes a $7 million commitment from Michigan.

Amid its stated plan to commit to more mid-market funds, Michigan is also consolidating the number of managers in its private equity program, Buyouts reported this year. Except for its $150 million allocation to CVC, all the retirement system’s Q2 commitments were re-ups.

“The strategy for the next twelve months will focus primarily on existing sponsors raising successor funds,” Michigan staff wrote in a memo. The retirement system’s PE team is also weighing co-investments and direct secondaries.

State of Michigan Retirement Systems valued its private equity program at $9.6 billion at mid-year. The system held 14.6 percent of its assets in PE as of that date.

Action Item: For more information on State of Michigan Retirement Systems, visit http://www.michigan.gov/ors/