Virginia to maintain investment pace as PE market enters pricey territory

  • Committed almost $4.5 bln over previous two years
  • Continuing to invest in co-investments, secondaries
  • PE program valued at $7.2 bln

Virginia Retirement System committed almost $4.5 billion to private equity over the past two years, setting an aggressive pace that its investment team plans to maintain as prices on new deals crest into expensive territory, a program review released by the system shows.

Recent commitments include large allocations to flagship funds managed by firms like Apollo Global Management, Bain Capital, Olympus Partners and a direct-lending fund managed by Audax Group.

On average, U.S. PE firms are paying more than 10x their new portfolio companies’s annual Ebitda, S&P data cited by Virginia staff shows. In 2007, at the height of the pre-recession buyout boom, PE firms were paying 9.7x Ebitda on average.

High prices, fueled partly by the availability of cheap debt, represents only one of several headwinds facing Virginia’s PE holdings, an annual PE review prepared by the state’s investment team says.

LP demand is driving up the size of top-performing funds, creating massive capital pools that must be invested in new deals as the economy rounds into the ninth year of its growth cycle.

Even so, Virginia plans to “maintain [its] commitment pace” and continue its strategy of forming large separate accounts with fund managers. In October, the retirement system committed $1 billion to a separate account with Antares Capital to invest in loans to mid-market companies.

Virginia declined comment.

The retirement system also expects to remain active in the co-investment and secondary strategies, though it’s run into difficulty executing on the latter, the program review says.

The secondary market remains relatively pricey, with the average secondary deal pricing at 93 percent of the underlying fund’s net asset value, according to a recent report by PE-fund adviser Triago.

In January, Virginia acquired a combined $31 million of stakes in ABRY Partners VII and VIII on the secondary market, an investment report says.

The retirement system’s PE team is led by Director John Alouf with Portfolio Manager Jay Gentry. Rob Voeks, Peter Murphy and Katie Baskind are senior investment officers.

Virginia’s $7.2 billion private equity program was netting a 10-year annualized return of 9.5 percent as of Jan. 31, beating its benchmark by half a percentage point. The top-performing strategies within the portfolio were growth equity, buyout and turnaround investments.

PE was a positive contributor to Virginia’s overall investment portfolio, which delivered an annualized return of 6 percent over that period.