Montana sells chunk of PE portfolio, backs two new funds

Montana Board of Investments recently sold off a $70 million chunk of its private equity portfolio, part of an overall plan to reduce its exposure to funds of funds that were used to build out its portfolio in the previous decade.

The board, which manages $11.2 billion in its consolidated asset pension pool, also made two $40 million commitments to new private equity funds and discussed its investment-pacing plan at its October meeting.

The secondary sales had been in the works for some time, as Montana reshaped its PE portfolio, according to Investment Officer Michael Nguyen.

Montana sold 10 positions in funds of funds managed by Adams Street Partners, along with its $23 million stake in GI Partners’ Fund IV, for a total of about $70 million, Nguyen said at the meeting.

Adams Street Partners has been one of Montana’s longest-standing relationships in PE, but the state investment board wanted to capitalize on a good seller’s market and refocus its portfolio on direct fund investments.

“That’s how the portfolio was built out in the early days, through funds of funds,” Nguyen said.

“Good returns, good relationship. At this time, we felt like it was tail-end pieces, and with where the market environment is healthy with equity markets, higher leverage, lots of dry powder from secondary funds, it would be an opportune time to sell those assets. … It’s a great time to be selling. There’s a lot of money in the market.”

The GI fund was sold for a good price, given its performance, and Montana’s decision not to re-up with GI for its fifth fund was another factor that contributed to a sale, Nguyen said. Montana plans to consider additional secondary sales on an opportunistic basis.

“There is no portfolio need to sell these assets, so we are really driven by the opportunity to sell, and the pricing,” Nguyen said.

“It’s not that we’re over allocation and we need to sell at a discount. We’re only selling from an opportunistic point of view.”

While Montana is shifting away from fund of funds more broadly, the state isn’t closing the door on that space, according to Investment Analyst Thomas Winkler.

“We are making less and less fund-of-fund commitments, focusing more on direct access,” Winkler said.

“The most recent ones you see in 2016 [and] 2018, those are actually Asian-focused fund of funds. That’s a marketplace where we don’t have great direct access yet, so we’re utilizing fund-of-funds investments to gain access to direct relationships with general partners in that space.”

What’s new

In new commitments, Montana committed $40 million to Hammond, Kennedy, Whitney & Co’s HKW Capital Partners V, a lower-middle-market buyout fund, and $40 million to Chickasaw MLP, a publicly traded midstream-energy equity strategy.

Montana previously committed $20 million to HKW’s fourth Capital Partners fund, and the increased allocation amount reflects its desire to write bigger checks to fewer trusted managers, Investment Analyst Emily Kovarik said at the meeting.

HKW focuses on business services, health and wellness, and infrastructure, and also has more leverage discipline than most PE managers, Kovarik said.

“As part of our pacing studies, we’ve begun doing higher commitments to our high-conviction managers in an effort to help trim our portfolio into a manageable number of names,” Kovarik said. “That’s why you’re seeing a higher number.”

Montana currently has an 11 percent allocation to private equity and a portfolio worth about $1.2 billion.

The portfolio is about 75 percent allocated to buyout strategies, and that focus will likely remain consistent, while venture capital allocations decrease and debt-related strategies increase, according to Nguyen and Winkler.

The state has committed $365 million to private equity in 2018, a significant increase from previous years, and it has a “soft target” of committing $350 million per year to PE in its pacing plan, Nguyen said.

“Historically, maybe we’ve underallocated, or been more conservative in our commitments,” Nguyen said. “We’re looking at $350 million, but we could go to $450 million or more given the opportunity set.”

Action Item: View board meeting materials here https://bit.ly/2yE1Yxx