Lots of things about Florida confuse me. Like its inability to manage federal elections, or why it was allowed to have two major league baseball teams. But a more relevant example of eccentricity came would be The Florida State Board of Administration’s decision to sell a stapled portfolio on behalf of Liberty Partners.
This is the first such offering from a state pension fund on behalf of a captive private equity fund. This is also the first time I’ve ever described a private equity transaction as corporate welfare.
Some background: Florida has been Liberty’s only limited partner since the New York-based firm was founded back in 1992. In turn, Liberty was Florida’s first general partner (via an evergreen fund), and its only one for more than a decade. Florida has since diversified its private equity portfolio, but this new stapled secondary reflects how tightly bonded the two entities remain.
The deal is structured as follows: Liberty has packaged six portfolio companies, which it will sell for approximately $190 million to a secondary buyer, or group of secondary buyers. This price is at-cost to Liberty, minus a small percentage ownership being retained by Florida. The portfolio companies will then be rolled into a new Liberty fund, which will be supplemented by another $190 million from the secondary buyers (i.e., the staple). Florida itself will not participate in the new fund, save for its minority ownership positions of the six cornerstone portfolio companies.
To its credit, Florida’s participation in this deal will help it further reduce its exposure to Liberty, which should free it up to invest more with other general partners. This is sorely needed, when one realizes that Florida’s current Liberty exposure sits at around 30% (it was 40% at the end of 2005). But Florida also may be artificially restricting the number of potential buyers, as some groups might not be interested in the “blind” commitment. This includes not only direct secondary buyers, but also possible strategic and financial sponsor buyers.
And pay attention to my use of the term “buyers” – which is distinct from “bidders.” The stapled transaction comes with a fixed price of “at-cost” – which means that Florida is giving up its opportunity to make a profit on these investments (save for its retained minority stake). A non-stapled sale would have at least held the possibility of a profit — albeit a faint possibility given that Liberty acquired the six portfolio companies fairly recently.
As I wrote, this smacks of a friend’s attempt to save another, as Liberty would have been unable to raise an independent fund on its own. It’s made such overtures in the past, but been rebuffed. It is also different than a typical stapled secondary, in that the secondary buyers will become the new blind pool’s only limited partners (again, save for that small Florida piece).
This isn’t Bank of America spinning out Scale Venture Partners, where buyers knew they would be part of a large syndicate that also included the seller (i.e., a gesture of faith). This could be just a few folks, with the general partner never needing to prove itself on the open market.
So maybe Florida is simply exhibitting a noble piece of institutional loyalty, but a state pension system should only serve one master: Its pensioners. In this case, it should be doing a better job of it.
A spokesman for the Florida State Board of Administration said he’d get back to me. But that was a while ago. When he does so, I’ll be sure to let you know. I also called Tripp Brower of Capstone Partners, which is managing the transaction. He declined to comment, citing confidentiality restrictions.