North Carolina explores secondary sale to cut costs

  • NC to cut $100 mln of investment costs over four years
  • Secondary sale to include “low-conviction” funds
  • $104.8 bln institution explores separate accounts, reducing fund-of-funds exposure

North Carolina’s State Treasury is exploring a secondary sale of some of its holdings in private equity and real estate to reduce the cost of the state’s $104.8 billion portfolio.

The secondary sale would include “low conviction” PE, real estate and private market funds, North Carolina documents say. Investment bank Houlihan Lokeywill facilitate the sale.

Minutes from the North Carolina Investment Advisory Committee’s November meeting indicate Houlihan Lokey would complete one more “deep-dive” on portions of the PE portfolio before presenting its recommendations to State Treasurer Dale Folwell, the sole trustee of the state’s retirement and investment assets. The IAC advises the treasurer on investment-related issues.

North Carolina staff is reviewing a number of private fund stakes for a potential sale and hasn’t finally decided what will be offered on the secondary market, spokesman Brad Young told Buyouts.

The planned secondary sale is one component of a plan to trim $100 million of costs from North Carolina’s investment program over the next four years, state documents say. During the previous fiscal year, the program tallied a little more than $600 million of costs, roughly 85 percent of which came in the form of management and incentive fees paid out to external investment managers.

Management and incentive fees, also known as carried interest, charged by private equity and real estate managers represented more than half of those external investment costs, according to the retirement system.

In addition to engaging the secondary market to unload certain private market holdings, North Carolina will shift away from funds-of-funds, in addition to exploring the creation of private market separate accounts, a presentation by state investment staff shows.

Institutional investors sometimes avoid funds-of-funds because of the extra layer of fees associated with those strategies. Private market fund-of-fund managers charge management fees and carried interest in exchange for allocating client assets into a variety of underlying vehicles, which also charge fees and carry.

In an email to Buyouts, Young said North Carolina is exploring a number of options for its funds-of-funds holdings, including a secondary sale. No final decisions had been made as of March 28.

Certain institutions, including major PE limited partners like California Public Employees’ Retirement System and Teacher Retirement System of Texas, obtain additional savings by using separate accounts with private market fund managers. Certain managers will charge LPs lower fees in exchange for larger commitments to these accounts.

“Our investment staff is researching private equity separate accounts but has not had any substantive discussions with any firms,” Young wrote in an email.

North Carolina’s retirement system had $4.6 billion of assets in PE as of Feb. 28. The portfolio includes stakes in 146 funds and has netted a 7.41 percent internal rate of return since inception.

Action Item: More about North Carolina’s portfolio: