NEXUS 2024: NYC pension LP says tougher fundraising environment healthy for the industry

The tougher fundraising environment, with targets taking longer than ever to hit and some GP franchises floundering, is healthy for the industry, a major LP said on stage at the NEXUS 2024 conference in Orlando Friday.

In a cross-conversation with Warburg Pincus CEO Chip Kaye, Eneasz Kadziela, the head of private equity with the New York City comptroller, said the frantic fundraising pace of 2021 was something of a burden for LPs.

“In 2021, we were cracking at the seams in terms of how our small team was reacting to the deluge of funds coming back … that was a tough environment for LPs to go through and our system and infrastructure was not set up to process such turnover,” Kadziela said.

“What we have now is a healthy environment. It’s forced GPs to slow their pacing. GPs have to raise the bar for new investments. LPs can now see more proof of how portfolio companies are performing and how GPs are adding value in their current fund,” he said.

Kaye said the current environment will help establish or destroy PE reputations. “When you live in a version of the environment we’ve lived in for a long period of time, it’s sometimes difficult to figure out why people made money and whether that is something that is sustainable,” he said.

A slower GP investment pace is helpful in terms of naturally allowing the system to diversify by vintage year, Kadziela said. “We’re happy with where we are today and we are leaning in from a capital deployment standpoint, with more time to build conviction in our recommendations,” he said.

NYC’s pension system has a blended 10 percent target allocation to private equity, which it boosted last year from 8 percent. The system will look to grow its allocation in part by building more exposure to secondaries funds, he said.

“We’ll continue to access that strategy as part of our portfolio construction,” Kadziela said.

He also has a fairly negative outlook on continuation funds, which he said often leave the system with two tough choices – sell at a discount or roll into a structure that may not fully align the interest of LPs and GPs.

“I will say that in many cases we’re not happy with the situation that we’re forced into, and perhaps the limited options we have and how we can assess those options,” he said, adding that the system usually just chooses to cash out in such deals. “The option to roll comes with the need to review extensive documents and underwrite individual assets in a limited time frame.”