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Arizona Stays Active At Lower End Of Market

The $23 billion Arizona State Retirement System, a relative newcomer to the private equity asset class, has made a handful of commitments recently and expects to make several more soon, as it builds its way toward a target allocation of 7 percent. As of March 5, the actual private equity allocation stood at 1.6 percent.

The limited partner, whose target allocation range extends from 5 percent to 9 percent, intends to commit $450 million both this year and next to private equity, according to a pension fund document. Arizona says it is particularly interested in general partners that invest in small companies. This part of the market historically has used less leverage and has seen lower purchase price multiples, according to a pension fund document. Arizona also may form an opportunistic private investment allocation earmarked for emerging managers. Markets of particular interest include energy, clean tech, infrastructure, distressed-for-control, turnaround and secondaries.

Commitments made by Arizona this spring, totaling $320 million, went to such funds as Arlington Capital Partners III, for investments in mid-market companies in heavily regulated markets like defense, aerospace, telecommunications and health care; energy infrastructure vehicle Energy Capital Partners II LP; buyout vehicle Kinderhook Capital Fund III; health care and life sciences buyout fund Linden Capital Partners II LP; turnaround fund Littlejohn Fund IV LP; growth capital vehicle Seidler Equity Partners IV LP; and government-related buyout fund Veritas Capital Fund IV LP.

All told, the state’s private equity portfolio includes about 35 private equity managers. The state has about $1.5 billion in outstanding commitments, about $1 billion of which has gone to corporate finance funds, $380 million to special situations funds and $65 million to venture capital funds. Arizona received permission to commit to the asset class in October 2006, and it made its first pledge in September 2007.

Past commitments include ones to Accel-KKR Capital Partners III LP, which takes majority stakes in mid-market technology companies; Maranon Mezzanine Fund LP, whose investments range from $5 million to $30 million; lower-mid-market buyout fund Levine Leichtman Capital Partners IV LP; mid-market buyout fund Nautic Partners VI LP; and Yucaipa American Alliance Fund II, which invests in control-stake buyouts.