Saturday, March 10, 2012

Pennsylvania Public Pension Picks PEUs for $1 Billion

Pensions&Investments reported:

Pennsylvania Public School Employees' Retirement System, Harrisburg, committed up to a total of $975 million to eight funds, spokeswoman Evelyn Tatkovski confirmed in an e-mail.

The $47.9 billion pension system committed up to $200 million each to Apollo European Principal Finance Fund II, Carlyle Energy Mezzanine Opportunities Fund and Cerberus Institutional Partners V; up to $100 million to Partners Group Secondary 2011; up to $75 million each to AG Core Plus Realty Fund III, managed by Angelo Gordon; Exeter Industrial Value Fund II and Bell Institutional Fund IV, and $50 million to Tenaya Capital VI.
The Apollo fund invests principally in non-performing loans (or NPLs) in Europe. Wasn't that MFGlobal's strategy?  Cerberus Institutional Partners V is mentioned in recent SEC filings, however they don't illuminate the purpose of the fund.

A closer look at Carlyle Energy Mezzanine Opportunity Fund reveals it invests primarily in mezzanine debt in energy and power projects and companies in the U.S. and Canada.

The Energy Mezzanine Opportunities team’s core strategy is to pursue privately negotiated debt investments in North America energy and power projects and companies. The team augments its core strategy by seeking investments in dislocated secondary debt markets. The Energy Mezzanine group’s debt investments can take on many forms including second lien debt, senior subordinated debt, senior holding company debt, convertible debt and preferred stock.
Carlyle stands as an energy vulture, waiting for secondary debt to dislocate.  The Carlyle Group knows this, given affiliate Semgroup's and Stallion Oilfield Services' bankruptcies.  PEU boys are quick learners.  I imagine they asked, how can we make big money off our failures?

The team targets investments with the following characteristics: (i) collateralization by hard assets, (ii) appropriate range of leverage profiles (iii) current cash yield, (iv) proven technology, (v) mitigated financial, commodity, and construction risks (if applicable).
Billions in bad energy bets took down Semgroup, while leverage likely killed Stallion Oilfield Services.  Did Carlyle have to explain either story in their sales pitch to Pennsylvania's Public School Employees' Retirement System (PSERS)?  I hope someone did their homework.

PSERS has 20% of investments in private markets, which includes private equity underwriters (PEUs).  This segment returned 9.9% last year, less than real estate and domestic fixed income.  That's a far cry from Carlyle's 30% annual return puffery, frequently mentioned by co-founder David Rubenstein.