Sacramento County Employees’ Retirement System Moves Toward First Secondary Sale

By David G. Barry


Seeking to better manage its private equity portfolio, the Sacramento County (Calif.) Employees’ Retirement System (SCERS) is for the first time moving towards selling stakes in past fund investments.
The $12 billion fund’s board has authorized staff to select and retain an advisory firm to lead a secondary sales process for fund-of-funds investments in its portfolio.

According to an agenda report, SCERS’ staff and consultant Cliffwater believe the pension fund should sell its positions in fund- of- funds that it backed between 2006 and 2008. Funds under consideration included ones from HarbourVest Partners, Abbott Capital and Goldman Sachs.

By selling these positions, SCERS would be able to bring its private equity allocation – which was at approximately 13% in December – closer to its 11% target allocation. The move also is seen as a means for the SCERS board, staff and Cliffwater to become comfortable with the secondary process and provide a foundation for future secondary sales.

According to an analysis done by staff and Cliffwater, SCERS has 24 funds which might be primed to be sold in a secondary transaction,  either because the pension fund is no longer active in the segment, has not invested in a firm’s subsequent funds or it simply makes sense to lock in performance.

The fund- of- funds fall into the “no longer active” segment as SCERS since 2010 has implemented a direct fund investment strategy. There are, according to the analysis, six such funds that have “minimal upside remaining” given their vintage. They’ve generated  a net internal rate of return (IRR) of 12.6%, which significantly trails the net IRR of 24.7% that SCERS’ direct fund investment have generated over the past 12 years.

SCERS has seven funds where it might make sense to sell to lock in gains and has it 11 funds where it has not backed the manager’s subsequent funds.

SCERS has 50 funds that it sees as “long-term holds.”

Staff and Cliffwater will now look to identify an advisor and bring forth a sale plan to the board. If approved, it is expected to close in the second or third quarter.