Wisconsin Hikes Co-Investing To Up To $100M Per Year

Separately, Wisconsin plans to allocate a fresh $1 billion to buyout funds in 2013, equaling its commitment target last year, according to supporting materials for its May 15 meeting released recently.  

The pension fund expects a “large number” of potential investments with existing general partners in 2013 with some funds. While it will “discontinue a number of existing relationships,” it plans to commit to new funds on a selective basis in the small and middle market, the documents show. It’s also moving toward a long-term allocation target for emerging managers of 10 percent, up from about 4 percent now. It plans to boost its allocation to secondary funds to 10 percent from its current weighting of 3 percent.

The pension fund noted that the “middle market is the place to be” with private equity investing because of lower average purchase multiples, lower average debt multiples and higher equity levels in deals.

Last year, Wisconsin reduced its exposure to large/mega private equity funds to 38 percent from 46 percent of its fund by selling off parts of its portfolio on the recommendation of its private equity adviser, StepStone Group. Wisconsin’s secondary sale of positions in 12 funds managed by six firms including The Blackstone Group, Kohlberg Kravis Roberts & Co., and The Carlyle Group. While it targeted $1 billion to private equity in 2012, the fund ended up booking $1.25 billion in commitments, with 84 percent of that capital going toward existing relationships with general partners.

Turning to its co-investment program, Wisconsin plans to target up to $100 million per year for three to five deals each year. The money would be for the co-investment portfolio only, separate from its $1 billion allocation for its existing private equity portfolio in 2013, according to Wisconsin spokeswoman Vicki Hearing. Direct investing allows limited partners to participate in direct ownership stakes of portfolio companies outside of pooled private equity funds, which typically charge a 2 percent management fee and 20 percent of the carried interest.

Estimated costs to run a co-investment program amount to less than 30 basis points for upfront legal and advisory expenses, according to Wisconsin’s documents. The potential fee savings on a $100 million commitment from year one could be $24.2 million over five years. Wisconsin plans to add a senior-level person in the third quarter to bring its private equity team up to six people. It will begin sourcing direct investing opportunities in the first quarter of 2014.

A report on co-investing presented by Scott Parrish, portfolio manager for private equity, also listed risks posed by direct investing:  potential loss of capital, limited diversification, adverse selection, deal execution and deal monitoring. The pension fund already has a track record with direct investing via 52 deals from 1986 to 2003 under an earlier program. As of Dec. 31, 2011, those co-investments delivered a net IRR of 14.7 percent and a 1.7x net multiple.

In 2003, Wisconsin shifted its focus to fund investments. In 2008, a partnership was established with Northwestern Mutual Life for both equity and mezzanine co-investments, but it was discontinued in 2011 because of new regulations from the Securities and Exchange Commission.