PA Schools bets big on Avenue’s energy debut, readies secondary sale

  • Allocates $200 mln to Avenue
  • Allocates $250 mln to Carlyle Energy Mezz
  • Hires Cogent to run $2 bln secondary sale

The Pennsylvania Public School Employees’ Retirement System committed up to $450 million to energy and debt funds at its Dec. 9 meeting, including as much as $200 million for Avenue Capital Group’s first dedicated energy fund, according to board resolutions published on the retirement system’s website.

The $200 million allocation to Avenue Energy Opportunities Fund is the retirement system’s 11th commitment to the Marc Lasry and Sonia Gardner-led firm.

PSERS would hold more than a quarter stake in Avenue’s Energy Opportunities Fund should it obtain its full allocation. Avenue set a $750 million target for the vehicle, which will invest in distressed and stressed companies in the North American energy and utility sectors. The fund will focus on debt securities issued by independent power producers, coal-related businesses, exploration and production and energy services companies.

Although Avenue Energy Opportunities Fund marks the firm’s first dedicated energy fund, Avenue has invested $7.5 billion in the energy and utility sector since 1997 through its U.S. Fund series. Those investments grossed a 22.9 percent internal rate of return as of June 30, according to Pennsylvania documents.

The $52 billion retirement system allocated up to $250 million to The Carlyle Group’s second energy mezzanine fund, which is targeting $2.5 billion for credit and structured equity investments in U.S. and Canadian energy assets. Carlyle will invest between $30 million and $500 million per deal, with plans to hold its assets for an average of three years.

The firm will target a gross internal rate of return between 15 percent and 18 percent for Carlyle Energy Mezzanine Opportunities Fund II. Fund I, a $1.4 billion 2012 vintage, has netted a 20.4 percent IRR since inception, according to Pennsylvania documents.

In addition to its commitments to Avenue and Carlyle, PSERS also cleared the way for a sale of roughly $2 billion of stakes in private market funds at its Dec. 9 meeting.

The secondary sale resolution approved by the board stipulates that the retirement system will not sell its fund interests for less than 95 percent of their June 30, 2014, net asset value. PSERS hired Cogent Partners to manage the sale, confirming an earlier report from Bloomberg.

“PSERS made the decision to sell a portion of its private equity funds to take advantage of market conditions to bring PSERS private markets allocation closer to its target of 15 percent,” spokeswoman Evelyn Tatkovski Williams said in an email. The retirement system held a 16.3 percent allocation to private equity as of September 30, according to state documents.

Williams declined to comment on what fund stakes the retirement system will sell.

Pennsylvania Auditor General Eugene DePasquale recently said he was concerned with the level of due diligence the state’s pensions undertake in choosing managers and that he is a “fan” of limiting exposure to alternative investments.