San Diego stressed by Blackstone’s New Mountain stake

Blackstone has acquired a 9 percent stake in private equity firm New Mountain Capital, and one LP says that the move speaks to an overheated market for private equity deals.

San Diego County Employees’ Retirement Association has spoken recently about its hesitance to put more money into PE while valuations are high and limited partners are hungry to get more capital out into the market.

SDCERA, which manages a $12.9 billion trust fund, learned of the Blackstone investment from an Oct. 15 letter to New Mountain Capital’s limited partners, including SDCERA.

“Institutional investors like us put money with Blackstone, and the money is now being taken from that fund to go buy another private equity fund,” CIO Stephen Sexauer said at the pension fund’s October board meeting.

“We talk a lot about where valuations are, the amount of cash that’s trying to go to work. On average, it just can’t end well when you have things like this. That’s why we’re going slow, that’s why we’re looking for good long-term partners. It’s just too asymmetric against us.”

SDCERA’s private equity allocation is 6.3 percent vs. an 8 percent target, and its overall private markets allocation is 20.3 percent, below its target of 23 percent.

“It’s lower than the policy because we have not been putting money in private markets,” Sexauer said at the meeting.

Sexauer said New Mountain Capital’s performance for the retirement fund has been excellent, adding: “If all of our private markets had done as well as they have for us, we would be thrilled.”

New Mountain told LPs that Blackstone Strategic Capital Holdings Fund had acquired 9 percent of the partnership stake in New Mountain Capital through a strategic partnership, providing growth capital that would benefit both New Mountain and its LPs, according to Sexauer.

One board member questioned whether Blackstone was becoming more like a fund of funds with its minority purchase.

“I don’t know the details yet,” Sexauer said. “It’s a private markets fund that makes investments, and they bought into another private fund.”

Minority stakes of private equity firms have been traded with some regularity in recent months.

Harvest Partners, a middle-market private investment firm, said on Oct. 19 that it had sold a 15 percent minority stake to Goldman Sachs Asset Management. Just two months earlier Golub Capital announced a minority investment by Dyal Capital, a division of Neuberger Berman, Buyouts reported.

Last year, Blackstone took a less than 15 percent stake in Leonard Green and Partners.

New Mountain Capital could not immediately be reached for comment.

Action Item: View SDCERA’s latest risk-return report: https://bit.ly/2JbmeeO.