New Mexico SIC ’18 PE lagged pacing target as it struggled to access preferred funds


New Mexico State Investment Council, private equity, pension fund, David Lee,
Sunrise at Overlook Point near Bandelier, New Mexico. Photo courtesy Dean_Fikar/iStock/Getty Images
  • Assets under management: $23.75 bln
  • Target allocation to PE/VC: 12 pct
  • Actual allocation to PE/VC: 9.26 pct
  • Current value of PE portfolio: $2.2 billion
  • Key advisers/consultantsPavilion Alternatives Group
  • Whom to contact for a meetingCharles Wollmann (charles.wollmann@state.nm.us)
  • Why this is important: Smaller LPs have a harder time accessing preferred GPs.

New Mexico State Investment Council committed less than half its pacing target for 2018 private equity as it carefully selected opportunities and missed out on some of its preferred choices because of a sharply competitive fundraising environment.

SIC committed $285 million, compared with the target range of $550 million to $650 million, across funds from Vista Equity Partners, Bridgepoint Europe, JMI Equity and Hellman & Friedman.

David Lee, director of PE, New Mexico SIC. Photo sourced from LinkedIn

The sovereign fund was surprised that the aggressive multiples in the private markets did not reduce fundraising, especially for larger funds, in 2018, Director of PE David Lee told ActiveLPs.

Shortened fundraising cycles, bigger funds, sharp demand from other LPs, and bigger first closes for preferred managers were a surprise as well, he said.

“There was no decrease in appetite for these funds,” Lee said.

In the hypercompetitive fundraising environment, SIC last year missed out on some fund opportunities. “We found ourselves in that situation because the best GPs do have their pick of LPs,” Lee said.

Going forward, the system is confident it will get preferred allocations for a few reasons, he said. Some of its core managers, and other managers it was interested in, are coming back to market this year, he said.

Additionally, “we are a sovereign-wealth fund, we don’t have pension liabilities, we don’t have an underfunded status situation, so we feel like we can use this to convince very popular GPs to partner with us,” Lee said.

The fund in the past two years added Hellman & Friedman and New Mountain Partners to its core manager group.

Under pace

Commitments in 2018 fell short of the pacing target for several reasons, Lee said. Most important, the system does not have to meet its pacing target.

SIC also must consider the large unfunded portion of the PE portfolio, valued at about $1.4 billion as of June 30, 2018, he said.

“If there is a market correction like 2008, we don’t want get into a situation where we get priced out of the market because we far overallocated versus our strategy,” Lee said.

The late market cycle is a concern for SIC. “We don’t have a crystal ball to predict when the downturn hits, but we are not super-excited about the cycle right now,” said Chris Cassidy, senior analyst with the sovereign fund.

SIC is hoping distributions out of the PE portfolio begin to exceed contributions. The system has put out more capital than it’s collected in PE since at least Dec. 31, 2017.

Indeed, the gap between the sovereign fund’s net contributions and net distributions widened in 2018 compared to previous years.

Net contributions were $4 billion and net distributions were $3.77 billion since inception as of June 30, 2018. That gap has existed since at least Dec. 31, 2017, when net contributions were $3.8 billion and net distributions were $3.6 billion.

“If you believe that PE should be buying low and selling high, they have certainly not distributed enough,” Cassidy said.

The sovereign fund’s national private equity strategy includes buyouts, venture capital, growth and special situations.

The sovereign fund was invested across 118 funds, of which 67 funds were buyouts, 22 were special situations, 17 were growth and 12 were venture capital funds.

The PE portfolio produced a net internal rate of return of 11.5 percent and a net multiple of 1.48x as of June 30, 2018. The portfolio made net gains of $107.5 million in Q2 2018.

Action Item: Read more on the sovereign fund here https://bit.ly/2M2iJbR