The exit drought and extended holding periods in private equity is causing mounting pain for many LPs. But for Austin-based COAERS, it is providing ample market to pick up bargains in the secondary market. Sarah Rundell spoke to CIO David Kushner.
The $4.5 billion City of Austin Employees Retirement System (COAERS) has begun building out its target 8 per cent private equity allocation via the secondary market.
The strategy has opened up a rich hunting ground for discounts, diversification and fast deployment because of the number of LPs being forced to sell assets to generate liquidity to invest in new GP strategies, says David Kushner, chief investment officer of COAERS, in conversation with Top1000funds.com.
“Allocators with assets in the ground need the liquidity,” he reflects. “We are in a position to take advantage of that need and go into the secondary market and buy a fund at, say, 80 cents on the dollar and get an immediate write up of 20 per cent. Then we just have to be patient, as eventually those companies will have to turn over.”
He favours lower to mid market portfolio companies because they won’t necessarily have to IPO, or sell, for COAERS to get its liquidity. Smaller companies, he explains, have alternative exit opportunities like selling to other companies in a related industry or strategic roll ups, as well as listing. He adds the absence of exits and distributions in private equity has created most illiquidity and buyer opportunity in tail-end or late stage funds.
Although the SpaceX IPO may act as a catalyst to get more private AI and tech companies to list, he believes companies remain reluctant to go public because of the compliance costs associated with listing.
COAERS size also means it can only make small allocations. Kushner plans to deploy $100 million across three to five private equity managers annually in small bite sizes that typically rule out interest from large GPs.
But in another nod to the tough market, he notes a spike in unexpected approaches from a handful of capacity constrained blue chip managers. GPs, he says, that “wouldn’t normally bother” with small, public pension funds only able to contribute relatively tiny amounts to of capital to their billion dollar funds.
secondary caution
Despite the opportunities, Kushner flags a variety of reasons why secondary investment requires treading carefully. Most important of which is a clear understanding of the moving parts of the market which spans LP-led funds, fund-of-funds, and GP-led single or multiple asset transaction. Although COAERS favours LP-led funds, he says “all have different angles to look at and consider.”
He adds that it is also important to identify the motivation of the seller and how much leverage it is possible to extract. Most sellers are selling because they want to re-up with their favourite managers: even though many LPs offloading funds in the secondary market are overweight private equity, they have to keep investing.
“Even with a mature portfolio, LPs have to keep committing and stay invested. Unless they want to scale back, in which case, they still have to invest, they just invest less.”
retail risk
Another reason to be cautious is retail investors.
It’s also another justification for buying into small GP funds. As the large private equity firms search new sources of capital they have increasingly targeted wealth and retail clients with new products. Transparency regarding the amount of retail capital sitting alongside institutional capital in a particular fund, fair fee structures and governance are common investor worries.
“The smaller end of the market is unlikely to go retail, and this is a concern. The large-end, like Blackstone and Carlyle, KKR and Apollo, is increasingly going retail, and we want to avoid the retail exposure,” says Kushner.
He says the recent issues in private credit highlight the reasons to be cautious.
COAERS’ allocation to private credit managers is also at the early stage. In 2023, the board approved the fund’s first allocation to private credit and by the end of that year COAERS had invested 2 per cent of its assets (of a stated 10 per cent target allocation) into the Blue Owl diversified lending fund, an evergreen, institutional investor-only vehicle.
It provided a front seat on the exodus of retail and private wealth investors from two of Blue Owl’s other private credit funds (Blue Owl credit income corp and Blue Owl technology corp) earlier this year, underscoring the risks for institutional investors of investing alongside retail investors.
COAERS’ private credit allocation is benchmarked against the LSTA Leveraged Loan Index and at the end of 2025 the fund allocated the remaining 8 per cent of private credit to Beach Point Capital. The strategy provides beta exposure to private credit through publicly traded bank loans.
As it allocates to private credit managers, COAERS will draw down the bank loan portfolio to fund manager capital calls in a process Kushner says will take three-to-five years.
“We have tried to match each of our private asset classes with a public component so we can get the beta exposures to our strategic asset allocation as we try to develop the private markets side,” he says.
Progress allocating to private credit managers has been slow because of capacity constraints at COAERS. The fund only has a four-person team.
Looking at opportunities and doing the proper analysis is a time consuming task.
“I want to make sure we take our time and build a portfolio properly, rather than rush. I always say to the team, show me all the reasons not to do the deal. We are willing and able to do this to build a world class portfolio.”
With a new hire about to begin, he is confident COAERS will start to draw down the bank loan exposure and allocate more to private credit managers in the next six months.
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