Florida SBA to Offload $4 Billion in Opportunistic Credit Funds
The Florida State Board of Administration is looking to sell a bundle of private credit stakes worth as much as $4 billion in what would be one of the largest deals of its kind, according to people with knowledge of the matter.
The pension fund is looking to offload between $3 billion and $4 billion as it seeks to cut exposure to higher-yielding opportunistic credit and invest more in mainstream direct lending, said the people, who asked not to be identified discussing private matters. The deal may end up being less than that range, and could be broken up into a series of sales where funds have the option of picking parts of the portfolio, the people said.
“The SBA is always evaluating opportunities to reposition investments in the fund, and to shift between strategies when those decisions can optimize our portfolio and maximize return,” Emily Percival, the Florida SBA’s director of external affairs and special projects legal counsel, said in an emailed statement. “As a policy matter, we do not publicly discuss the details of any potential transaction.”
The Florida SBA, which manages state pensions and other funds, aims to double its exposure to direct lending over the next few years, Trent Webster, a senior investment officer at the Florida SBA, said in an investment advisory council meeting in June. Webster also said the fund planned to shed higher-yielding, opportunistic credit stakes.
At the meeting, Webster said the fund “directionally will be going more into the income-generating and more of what I like to call boring credit.” The Florida SBA has backed many opportunistic credit strategies from firms including Blackstone Inc., Oaktree Capital Management and Värde Partners, according to public filings.
The pension fund’s decision to offload some of its holdings comes as the market for buying private credit stakes is booming. As much as $15 billion of such sales are predicted to close this year, according to a survey by Ely Place Partners Ltd., which advises firms on these types of transactions.
Firms focused on credit secondary deals including Coller Capital, Ares Management Corp. and Pantheon Ventures have increasingly large pools of capital to buy up such stakes. They’re typically often bought at a discounted price from institutional investors looking to generate some liquidity in the rapidly-expanding $1.7 trillion private credit market.
The slides below were taken from the SBA's investment advisory meeting in June (see full document here, it's extremely detailed):
You should also read SBA's latest monthly trustee report here as it too is packed with detailed information.
In fact, one thing I really like about Florida's SBA is the level of detail in their documents across all asset classes and there I give them an A+ on transparency (this is part of their governance required by state law).
Alright, so the headline figure of $4 billion out of private credit garners a lot of media attention but the plan has over $260 billion in assets now and from what I can read, this is just a portfolio move down the risk curve in private credit.
In particular, they are shifting $3-$4billion out of high yielding (riskier) opportunistic credit funds which make up 27% of their private credit portfolio into more lower yielding (more conservative) direct lending strategies which makes up 15% of this portfolio.
From the article above:
At the meeting, Webster said the fund “directionally will be going more into the income-generating and more of what I like to call boring credit.” The Florida SBA has backed many opportunistic credit strategies from firms including Blackstone Inc., Oaktree Capital Management and Värde Partners, according to public filings.
They are using secondaries market to offload some of these credit opportunity funds and they will do so at a discount but that's all part of business to manage the liquidity and diversify vintage year risk.
In fact, Florida's SBA is very active in the secondaries market in private equity, buying and selling funds to improve performance:
For Florida State Board of Administration, the effect of using the secondaries market to rebalance its PE portfolio is starting to show in its investment performance.
Florida SBA, which has $251 billion in assets under management, has been an active participant in the secondaries market over the past decade. The system’s private equity team has conducted six secondaries sales in the last 10 years, generating over $5 billion, according to its June investment advisory council meeting.
The system’s portfolio sales primarily involved divestments from its European and venture managers – both of which proved to be positive decisions. The system fully exited its stakes in eight European funds in 2014, a move that “jump-started” the performance of its European PE portfolio, according to John Bradley, senior investment officer for private equity at Florida SBA.
The pension’s European private equity portfolio saw its IRR increase from 6.9 percent in 2013 to 12.4 percent in 2023, according to documents prepared for the meeting.
Similarly, in its venture portfolio, the pension dropped four managers in the secondaries market in 2013-23. Its venture IRR increased from 8.4 percent to 15.3 percent over the same period, according to the documents.
“All those active decisions have paid [off],” Bradley said in the meeting. He added that the pension would see an increased GP turnover rate in the near term and would replace managers that continue to rely on financial engineering to generate profits.
According to Bradley, the team “anecdotally” tracked the performance of funds sold in the secondaries market after the deals were completed. It did so by tracking the returns of the funds as reported by other LPs. The divestments from the European and venture managers have proved to be beneficial to the system, he added.
Florida SBA has also been an active buyer in the secondaries market. In its October investment advisory council meeting, Bradley said the SBA had been bidding on second-hand fund stakes where it didn’t have a prior relationship – mainly in energy funds. The pension also looked to funds where it didn’t have a relationship because it previously cut off ties with a manager or because it wasn’t able to access a particular fund, Bradley said at the time.
The system’s previous divestments from European and venture GPs, as well as its recent search of second-hand stakes in energy funds, have demonstrated that the secondaries market is an area where the SBA can “use creative partnerships to access opportunities”, Bradley said in the June meeting.
“Our team has always had a contrarian culture,” Bradley said. “When everyone loves something, our tendency is to think maybe we shouldn’t. When things are hated, our tendency is to jump in and look for value.”
Florida SBA also backs secondaries investments via two GPs: Lexington Partners and Aegon Asset Management, which have generated a combined DPI of 1.1x and TVPI of 1.5x for the pension, according to the 10 June meeting documents.
The SBA’s secondaries portfolio, which returned 4 percent last year, was one of the two main drivers of its PE performance amid the downmarket, said Lamar Taylor, interim executive director and CIO at Florida SBA, at the meeting. The other driver was its buyout investments, which returned 10.4 percent in 2023.
In addition to secondaries, the pension will review alternative liquidity options such as collateralised fund obligations and NAV loans, according to Bradley.
“Both have become much more common over the past five years,” Bradley said, adding that CFOs and NAV loans could be more attractive if LPs must take a massive discount in portfolio sales in the secondaries market.
Indeed, as Sarah Rundell of Top1000funds reported back in July, Florida SBA mulls CFOs as alternative to secondaries:
Florida State Board of Administration (SBA) is exploring innovative new strategies in its $18 billion private equity portfolio like Collateralised Fund Obligations (CFOs) and “NAV loans” to tap liquidity and reposition the portfolio as an alternative to selling in the secondaries market where investors continue to get clobbered with massive discounts.
The SBA doesn’t have the statutory authority to put these strategies in place because they involve issuing securities. But speaking to the Investment Advisory Council during an asset class update in June, John Bradley, senior portfolio manager in private equity, said the investment team will resume the conversation with the Legislature next year, adding that these types of strategies have become much more common in the past few years.
Bradley explained that the highly complex CFO process typically involves GPs bundling stakes in private equity-owned companies into a single ($1 billion, for example) portfolio, contributing it to an SPV and securitising the cash flows, marketing interest-bearing securities to new investors to return cash to existing investors.
He added that these types of strategy offer a better cost of capital than the secondary market where in contrast to earlier years when investors used to sell at a premium, they now risk giving up a significant return.
The challenging secondaries market reflects the markedly changed conditions in private equity where the boom of the last decade has swung into reverse. Low interest rates and high growth led to “massive multiple expansion” but the decade ahead will be characterised by higher interest rates and slower growth, requiring portfolio companies to add value through their operations.
“The value created by GPs in the future won’t be same as in past,” predicted Bradley.
Strategies shaped around borrowing, M&A and growing the EBITDA are over. Today it is much more about being good owners of a business and driving value through operations, he said.
The SBA is preparing for more churn in its GP relationships. But forming new partnerships and creating access with top GPs is a laborious process alongside working down the existing list of GPs coming back to market. In the last year, SBA only closed with four new funds after a journey that began with 326 meetings and calls.
Manager due diligence is detailed and process orientated, striving for a consistent approach in how the investor reviews fund opportunities. At each stage the team debate if the opportunity is worth taking to the next level in a process that takes 3-4 months.
At the end of last year, the SBA was invested in 243 funds managed by 71 GPs of which 45 count as core relationships. Fifty three per cent of the private equity portfolio is concentrated in ten firms including names like Lexington Partners, Truebridge Capital and SVB Capital. These top ten names together represent 32 per cent of SBA’s committed capital today.
Contrarian strategy
SBA prides itself on a contrarian strategy.
For example, the team dug deep into traditional energy assets in 2020, snapping up secondary oil and gas assets, buying into fund and co-investments, as ESG-minded LPs bailed out of the strongly performing sector. But Bradley warned the benefits of active management and repositioning are often not felt for years.
Like overhauling the European portfolio in favour of regional, and country-focused funds. The SBA “took advantage of the 13-year bull market” to conduct six secondary sales over the past ten years, creating $5 billion in proceeds.
“We sold to realise value in the face of extreme valuations,” said Bradley. “The next evolution in European private equity is sector-focused fund investment.”
An exploration of how these assets sold in the secondary market went on to perform under new ownership revealed these funds went on to perform well. However, sharp falls in the euro produced an FX win that offset subsequent fund performance.
That contrarian approach is also visible in venture. In 2010 the SBA increased its exposure to venture at a time many other investors were throwing in the towel. The team put together creative investments via SMAs and fund-of-one to gain access.
“It turned out that venture wasn’t dead, and we reaped huge rewards ten years later,” said Bradley.
In 2021 the SBA reduced the venture portfolio via the secondary market, selling $1.8 billion in tech and venture assets.
The SBA’s bias to early-stage venture makes up two thirds of the portfolio. The majority of the allocation is in IT and software, largely around Silicon Valley, New York and Boston.
Bradley said that although the venture portfolio is down on the year, it has outperformed peer benchmarks and is the strongest performing sub strategy within private equity, an envelope of the portfolio that includes allocations like distressed and secondaries.
The future
The committee heard how the integration of IT into the private equity portfolio is another key focus and will include the modernization and cloud migration of legacy systems. Technology is leading to changes in how the SBA updates PE fund data, and is creating efficiencies.
Bradley concluded that the SBA will remain active in the secondary market and bring more co-investment in house where two staff members now oversee co-investment.
All this tells me Florida SBA has some pretty sharp managers that know what they're doing.
Below, private credit continues to be the biggest focus for limited partners in the next 12 months, according to a new Goldman Sachs survey. Goldman Sachs Global Head of Client Business, Asset and Wealth Management Division Matt Gibson discusses on "Open Interest".
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