Michigan in ‘planning stages’ of PE-portfolio consolidation

State of Michigan Retirement Systems is in “the planning stages” of consolidating its private equity portfolio to gain scale and boost performance, the $64.2 billion pension system disclosed in a quarterly investment report.

“Although very early in the planning stages, the consolidation effort is intended to concentrate the portfolio in fewer managers to gain economies of scale and to improve performance.  The consolidation effort is not expected to reduce the overall allocation to private equity,” said spokesman Ron Leix in a statement. “There are no set targets to the number of mangers SMRS will reduce in total, it will be on a manager by manager basis dependent on the portfolio fit, net return history and quality of the sponsor.”

Many public pensions, including California Public Employees’ Retirement System and State of Wisconsin Retirement Board, have reduced the number of their relationships with PE managers to bolster returns and possibly bring down costs. The strategy has often involved selling existing stakes in private funds on the secondary market, though Leix said that staff does not anticipate selling any of its existing stakes.

Michigan also is in the process of directing more resources to mid-market buyout strategies in the coming year to diversify its existing holdings in megafunds, an investment report the pension system released shows.

In the first quarter, Michigan’s $64.2 billion retirement system inked two commitments with middle-market buyout funds, allocating $100 million to Genstar Capital’s eighth flagship fund and $35 million to Huron Fund V, a $550 million fund led by Huron Capital of Detroit.

The retirement system also picked up $6.2 million of secondary-market stakes in three mezzanine funds managed by Crescent Capital Group. Michigan was already an LP in two of the funds in which it acquired stakes.

Michigan’s $9.7 billion PE portfolio returned $665 million of capital in the year ended March 31. The private equity program represented roughly 16.4 percent of Michigan’s investment portfolio as of March.

Action Item: More about Michigan’s retirement system: www.michigan.gov/ors/

Ford 1909 Model T’s sit outside the company’s Dearborn, Michigan, headquarters during a 100th anniversary celebration of the “Tin Lizzie” on Sept. 5, 2008. Photo courtesy Reuters/Rebecca Cook 

UPDATE: The story was updated to include comments from spokesman Ron Leix.