Montana to target smaller funds, secondaries

  • Small, mid-market funds offer better value, alignment: presentation
  • $10.2 bln pension to explore more secondary-market sales
  • Montana PE portfolio $1.1 bln as of March 31

Montana Board of Investments’ private equity staff is directing more time and attention to funds targeting smaller deals and smaller assets, according to a presentation Portfolio Manager Ethan Hurley will deliver to the board on Oct. 6.

Mid-market and lower-mid-market PE fund managers are better at creating value from their portfolio companies and often offer terms that more carefully align their interests with those of their investors, according to the report. General partners tend to use less leverage in small-market deals, which keeps purchase-price multiples on new assets lower than those seen in larger leveraged buyouts, the report said.

By the same token, Montana plans to be “selective with larger-cap re-ups,” citing fewer opportunities for managers to create value, the presentation showed. The pension will continue to commit capital to new funds raised by key, best-in-class managers, though it’s unclear whether staff has identified which managers meet that standard.

The strategy is consistent with Montana’s recent commitment activity. Earlier this year, Montana committed $35 million to a new middle-market buyout fund managed by Kinderhook Industries. The $10.2 billion pension fund also committed $35 million to Tenex Capital Management’s newest flagship vehicle and $20 million to lower mid-market specialist DFW Capital Partners, pension documents say.

Executive Director David Ewer did not respond to a request for comment.

Hurley’s presentation also indicated staff would seek opportunities to sell stakes in certain funds on the secondary market, a strategy Montana’s deployed before. In 2014, the pension sold stakes in eight fund partnerships, including vehicles managed by First Reserve and Madison Dearborn.

In archived meeting minutes, former Chief Investment Officer Clifford Sheets said staff chose funds based on several factors, picking vehicles that would be “readily received by the market” and GP relationships Montana did not expect to continue.

Earlier this year, the board netted $26.2 million of proceeds from selling $30 million of stakes in funds managed by Summit Partners and TA Associates.

In addition to holding its focus down-market, Montana is bullish on North American strategies as well as direct lending and energy-focused funds, according to Hurley’s presentation. The pension will likely avoid funds-of-funds.

Montana valued its PE portfolio at $1.1 billion at March 31, its Oct. 6 meeting materials show. The pension holds more than 85 percent of its PE exposure in U.S. or Canadian assets, with the rest in Western Europe, Asia and other markets.

Action Item: Find Hurley’s presentation in Montana’s Oct. 6 meeting materials at