Bloomberg News

NYC Pensions Said to Weigh Sale of Private-Equity Holdings

July 19, 2011

(Updates with fund-raising data in 15th paragraph.)

July 19 (Bloomberg) -- New York City’s pension plans may unload a $2 billion portfolio of buyout funds to trim their private-equity relationships, said two people with knowledge of the plan.

At least one of the five pension plans is weighing whether to sell stakes managed by Clayton, Dubilier & Rice LLC and Silver Lake Management LLC, said the people, who requested anonymity because investment decisions are confidential. Details about which holdings will be sold and what price would be acceptable are still being worked out, according to the people.

U.S. pension plans have been severing ties with asset managers through so-called secondary sales of private-equity stakes to free up money for new investments and improve returns. New York, which had 108 private-equity managers as of June 2010, is among investors seeking to concentrate bets with a smaller number of better-performing managers. Private equity accounted for about 6 percent of the $122.4 billion in assets for New York’s pension funds as of April 30.

“It was taboo for pensions to sell funds, but now they’re using a secondary sale as a portfolio-management tool,” said Brian Talbot, head of New York-based Neuberger Berman Group LLC’s secondaries team. “Pensions are invested in hundreds of funds, which has become a huge administrative burden that many of them have decided they can’t manage efficiently.”

Performance Gains

Overall, the city’s funds gained more than 20 percent in fiscal 2011, the most in 13 years, which Comptroller John Liu attributed to the hiring of new asset managers and improved stock and bond markets. That follows gains of 14 percent for fiscal 2010, according to a July 5 statement.

The private equity portfolio of New York City’s civil employees pension fund returned 12.5 percent since inception and 7.06 percent over five years ended March 31, according to a meeting agenda on the comptroller’s website.

Mike Loughran, a spokesman for Liu, Thomas Franco, a spokesman for New York-based Clayton Dubilier, and Jenny Farrelly, an outside spokeswoman for Silver Lake, declined to comment. Private-equity buyout funds typically use debt to buy companies with the goal of selling them within about five years. To pay the debt, the new owners try to improve operations and slash costs.

Earlier this year, the pension funds fired five of six activist managers who buy stakes in publicly traded companies and press for higher share prices. The funds dismissed included Breeden Capital Management LLC, headed by former U.S. Securities and Exchange Commission Chairman Richard Breeden, and Ralph Whitworth’s Relational Investors LLC.

In the secondary market, investors trade stakes in private- equity funds originally sold by buyout and venture capital firms. New York is hoping to capitalize on the growth of secondary sales and take advantage of record amounts raised to purchase previously owned private-equity holdings.

Ready to Sell

Among private-equity investors, more than one-third of North Americans, a quarter of the Europeans and as much as 42 percent of those in the Asia-Pacific region expect to stage secondaries sales in the next two years, according to the “Summer 2011” survey by Coller Capital Ltd. Those are record levels, according to Coller, a London-based buyer of secondaries, which said that as of mid-2008, only 22 percent of investors had conducted sales.

Sellers of private-equity fund stakes sometimes have to offer discounts from net asset value. Discounts were wider at the height of the 2008-09 financial crisis when sellers needed liquidity, according to Preqin Ltd., the London-based research firm. Those discounts have narrowed to about 19 percent of net asset value on buyout funds as pensions and endowments sell more opportunistically, according to Preqin.

Pooling Assets

Lexington Partners has amassed a $7 billion pool for private-equity secondaries, the largest of its kind, according to Preqin. There are 26 funds seeking to raise $18.6 billion to buy secondaries, according to Preqin, including Coller International Partners VI, which has a $5 billion goal, and AXA Secondary Fund V, which is targeting $3.5 billion from investors.

New York City’s pension funds serve more than 237,000 retirees and beneficiaries and 344,000 employees, according to the comptroller’s website.

The California Public Employees’ Retirement System, the nation’s biggest public pension fund, set the stage for secondary sales when it sold $2 billion of partnerships at the end of 2007, ahead of the financial crisis. Less than a year later, Calpers was hunting for new investments in private equity.

New York is poised to free up money for new commitments as private-equity managers commence raising new pools. KKR & Co., the firm run by Henry Kravis and George Roberts, is pitching its latest North American buyout fund and LBO firms globally are seeking more than $170 billion this year, more than what they sought in 2006, at the height of the private-equity boom, according to Preqin. Other firms seeking new pools include Providence Equity Partners and Warburg Pincus.

--Editors: Rick Green, Peter Eichenbaum

To contact the reporters on this story: Cristina Alesci in New York at calesci2@bloomberg.net; Jason Kelly in New York at jkelly14@bloomberg.net; Martin Braun in New York at mbraun6@bloomberg.net

To contact the editors responsible for this story: Rick Green at rgreen18@bloomberg.net; Mark Tannenbaum at mtannen@bloomberg.net


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