In what is usually a rubber stamp approval, Marin County Employees’ Retirement Association’s investment committee rejected a term extension request from Abbott Capital Management for one of its flagship fund-of-funds.
LPs usually approve term extensions unless a fund has had problems, though such requests can also lead to fee concessions. However, as LPs contend with overexposure to private equity and dwindling cashflow from distributions, even the most routine procedures are undergoing tougher reviews.
Marin County’s investment committee at its March 29 meeting voted against the recommendation of its staff to approve a two-year extension for Abbott’s ACE Fund VI, a fund-of-funds launched in 2008.
Buyouts watched a broadcast of the meeting.
According to a document detailing the staff recommendation, Abbott sent a letter to each LP in ACE VI on March 8 requesting the extension, asking for a response by March 27.
An extension will be granted if a majority of LPs approve Abbott’s request, meaning Marin County may be forced to remain in the fund, explained James Callahan, president of Marin County adviser Callan.
Abbott did not return a request seeking comment by press time.
ACE Fund VI originally had a 12-year term with three one-year extensions. Abbott used all the extensions and Fund VI is set to terminate on March 31, according to the document.
Callahan described ACE Fund VI as a diversified fund-of-funds with exposure to buyout funds of all sizes, plus growth equity and venture capital funds. Investment committee member Sara Klein said half of ACE Fund VI’s remaining investments were in growth equity and venture capital funds.
About 400 unrealized portfolio companies remain in ACE Fund VI, according to committee member Daniel Vasquez.
Marin County’s share of ACE Fund VI had a net asset value of $41 million as of September 30, 2022, according to the document. The system has paid $183,000 in fees to date in FY 2022-23, according to the document.
Callahan said the system has received $154 million in distributions from the fund. Marin County originally committed $100 million, making it ACE Fund VI’s largest investor.
“It has been a good multiple,” Callahan said.
Committee members expressed concerns about impending valuations for the funds included in ACE Fund VI. According to Klein, ACE Fund VI’s returns are based on September 2022 valuations.
Some LPs are expecting markdowns of fourth quarter valuations, especially for venture capital funds. Anecdotally, sources have told Buyouts that private equity valuations appear to be up slightly from Q3 marks.
“By continuing to rely on the valuations they are parroting to us, I don’t feel like their communications reflect reality. They are like a deer in headlights when they say, ‘let’s just extend’,” Klein said.
Rising interest rates and their impact on cost of capital concerned Vasquez.
Abbott co-president Jonathan Roth told Marin County’s investment committee in September that it may use secondaries to provide distributions, according to minutes from that meeting.
Callahan told the investment committee that Abbott is still considering possible secondary sales for ACE Fund VI.
“They looked at the secondary market this year and they were offered discounts of the underlying portfolio they felt” were too steep. “They believe there is more value in their portfolio,” Callahan said.
Callahan also explained that ACE Fund VI’s investment cycle became complicated due to the financial crisis in 2008.
According to Callahan, Abbott expected to invest in funds with 2009, 2010 and 2011 vintages. But the financial crisis resulted in many of the pool’s target funds delaying investments.
“Capital calls didn’t happen until 2011, 2012 and 2013, even though they may be in funds with a 2009 vintage year. The actual investments aren’t 10 years old, and they’re still not particularly mature in terms of the traditional private equity cycle,” Callahan said.
Callahan said 17 underlying funds in ACE Fund VI approached Abbott seeking extensions of their own.
“This is unfortunately of one of the things you see at the back end of fund lives. There tend to be more extension requests than you’d like to see,” Callahan said.
Other LPs remain mixed about the extension request.
“We agree with Abbott’s assessment that there is material value in the unrealized assets, and their assessment that liquidating in this market will materially reduce the realized value of those assets,” said the CIO of an ACE Fund VI investor who approved the extension.
“I’m not a fan of extensions in general. In this case, we did not vote; therefore we were counted as a no,” said another CIO of an ACE Fund VI LP.