- Retirement system rarely, if ever, acts as direct secondary market buyer
- Michigan committed $175 mln to fund last year
- Warburg Pincus XII is $12 bln in size
State of Michigan Retirement Systemsmade what appears to be its first significant move as an independent buyer on the secondary market earlier this year, picking up a $25 million stake in Warburg Pincus’s latest flagship fund, a quarterly investment disclosure the retirement system released showed.
Michigan is a longtime limited partner in Warburg Pincus funds. The firm ranks among the largest relationships in its private equity portfolio, according to a quarterly investment report.
Prior to the acquisition of its $25 million stake on the secondary market, Michigan committed $175 million to Warburg Pincus Private Equity XII in fourth-quarter 2015. Michigan has roughly $301 million of commitments outstanding with the firm as of June 30, according to pension documents.
Warburg Pincus closed Fund XII on $12 billion in late 2015.
State of Michigan Retirement Systems did not disclose the seller or purchase price for its new $25 million fund stake. The retirement system did not respond to multiple requests for comment. Warburg Pincus declined comment.
It’s unclear whether this marks the first time Michigan engaged the secondary market as a direct buyer. Quarterly investment disclosures released over the previous three years make no mention of a similar purchase, though it’s clear the $60.3 billion retirement system actively sought secondary-market opportunities for a number of years.
State documents indicate the retirement system was open to purchasing stakes in older PE funds in the aftermath of the financial crisis, particularly as banks unwound their alternative-asset portfolios after Dodd-Frank was passed.
Michigan also committed to secondary-market deals through intermediaries and secondary-market specialists. In 2013, Michigan committed $75 million to an AXA Private Equity (now Ardian) vehicle to purchase a position in CCMP Capital Advisors’s second buyout fund.
Michigan may continue to eye the secondary market as it expands its private equity portfolio beyond traditional buyouts, according to pension documents. Staff may also focus its attention on co-investments. Staff recently committed $135 million to HarbourVest Partners for co-investments, $35 million of which will be invested through a separately managed account.
State of Michigan Retirement Systems also followed through on its previously publicized plan to focus on mezzanine debt and other credit strategies, allocating $300 million across a pair of funds in the second quarter.
While the retirement system remained committed to several buyout funds in the second quarter, securing sizable allocations in flagship funds raised by Kohlberg Kravis Roberts and Thoma Bravo, it also made a pair of $150 million commitments to Crescent Mezzanine Partners VII (targeting $3 billion) and Blackstone Group’s GSO Capital Opportunities Fund III (targeting $6 billion). See the State of Michigan Q2 Commitments chart for detail.
“Credit remains attractive because of leveraged-loan and high-yield debt issuance, attractive coupon rates, low default rates, potential for equity upside and co-investment,” wrote staff in a report released in September.
Traditional buyout strategies face headwinds from stiff competition from other buyers, which drove up prices even as regulation curtailed leverage multiples, according to the report.
“Those headwinds will impact private equity returns,” they wrote.
Action Item: For more information about State of Michigan Retirement Systems, visit www.michigan.gov/ors/