CalPERS inks secondary deal with five buyers

The highly anticipated secondary market sell-off of a portion of CalPERS’ massive private equity portfolio has begun, with publicly traded Conversus acquiring $200 million in mostly special-situation fund interests. Oak Hill and three other firms also purchased fund interests, details of which remain opaque even to secondary market insiders.

The California Public Employees’ Retirement System has agreed to its first secondary sale of private equity fund interests, more than two years after the pension giant announced it would sell as many as 40 fund positions in middle-tier funds. In March 2005, this so-called ‘legacy portfolio’ was valued at approximately $2 billion, in addition to $1 billion in unfunded commitments.

Conversus Capital, a Euronext-traded fund of funds backed by Bank of America and Oak Hill Investment Management, said today that it was part of a five-firm consortium that inked a deal to buy “an attractive portfolio of private equity funds” from CalPERS.

Conversus’ portion of the portfolio consisted mostly of mature special situations funds, as well as venture funds, and as of 30 June 2007 had a net asset value of approximately $189 million and unfunded commitments of approximately $25 million. The deal was led out of its Menlo Park office by partner James Hale.

“We were pleased to purchase seasoned special situation and venture assets that furthered our portfolio construction goals,” said Conversus chief executive Bob Long.

Aside from Oak Hill, the names of the other buyers were not disclosed, nor were the types or total amounts of assets agreed to be sold.

“The assets were middle tier funds in our Alternative Investment Management portfolio (in contrast with upper tier funds, in terms of performance),” a CalPERS spokesman said.

It remains unclear, in fact, whether the five-firm syndicate’s purchase represents only a portion of CalPERS’ legacy portfolio, or the portfolio in its entirety.

“Certainly we do have a legacy portfolio we are in the process of dispatching, and that’s part of our restructuring plan that’s been underway for a year or so now,” a CalPERS spokesman told PEO. “The idea is to have our private equity staff work more intensively with the big end of the market – players like Carlyle, TPG and Apollo – and then have some new vehicles on the smaller end” targeting specific strategies or geographies, such as emerging markets or cleantech. The $260 billion pension fund has roughly 160 relationships with fund managers, according to sister PEI Media data provider Private Equity Connect.

According to one secondary market participant following the bidding, there was so much interest in the CalPERS portfolio, and so many different syndicates formed, it’s hard to know exactly who ended up with what.

In late July last year, CalPERS reportedly began sending out confidentiality agreements as a first step in the sale process, and in mid-October, UBS opened up bidding, which apparently went through multiple rounds. The process was characterised by another person familiar with the negotiations as “complex” but highly efficient, “innovative” and “sophisticated”.

The person said the process unfolded as follows: “Each of the syndicate members bid on the assets it desired, and through a back and forth process, each syndicate member was able to acquire the specific assets in the specific proportion that it desired.”

CalPERS was then presented with an aggregated bid.

The number of interested syndicates, and private equity firms reportedly demanding to approve the potential sales, however, further complicated the process.

“There was a fair amount of back and forth with the individual GPs in the process,” the person said. “Anyone who expected this to go off in two rounds over six weeks was unrealistic.”

The Conversus/Oak Hill consortium expects a first close on the acquisition(s) by the end of March, according to a statement. It was represented by Paul, Weiss, Rifkind, Wharton & Garrison, with Winston & Strawn acting as special counsel to Conversus and Oak Hill.