Marin County has tough questions for FoF managers Abbott and Pathway

“Nothing the managers said today gave me any confidence that we’re going to get distributions to the level of NAV they’ve marked on their portfolios,” says Marin County board president Sara Klein.

Marin County Employees’ Retirement Association will pause commitments to its private equity program next year due to worries about valuations presented by the system’s two fund-of-funds managers.

Some LPs are concerned about the accuracy of fund valuations provided by their GPs, which have remained strong amid public market volatility. Other LPs also do not want to pay additional fees to managers that have extended the life of their funds as they await exits on their remaining investments – made more complicated in the uncertain environment.

Marin County’s board chose to take no action on its private equity pacing plan for 2024 at its September 27 investment committee meeting, effectively pausing on commitments for next year.

Affiliate title Buyouts watched a broadcast of the meeting. Representatives from Abbott Capital Management and Pathway Capital Management, the two managers Marin County uses in its private equity portfolio, also attended the meeting. Spokespeople for the firms did not respond to comment requests.

“I’m having trouble accepting their NAVs at face value. Nothing the managers said today gave me any confidence that we’re going to get distributions to the level of NAVs they’ve marked on their portfolios,” said Marin County board president Sara Klein.

LPs nationwide face an issue categorized as “valuation risk” – the amount of an institutional investor’s portfolio calculated on fair-market valuations as opposed to instantaneous market pricing like public equities, according to a report from think tank Equable Institute based on publicly available data from the nation’s 225 largest public pension plans.

According to the report, 34.1 percent of public pension fund portfolios are comprised of fair-market valuated assets like private equity and real estate. In 2001, that number was 9 percent.

Legacy Valuations

The $3.1 billion Marin County system invests in 12 fund-of-funds evenly divided between Abbott and Pathway, according to a presentation from Callan.

The committee’s focus was on the oldest fund-of-funds from each manager, which date back to 2008. Marin County made $100 million commitments to each fund-of-funds, Callan said.

Pathway’s PPEF 2008 fund still held 286 portfolio companies as of the end of June, while Abbott’s ACE Fund VI held roughly 400 portfolio companies as of April, according to board documents and earlier board discussions.

Both of these funds have been extended past their initial investment terms, according to the discussion.

“We have two legacy funds that are supposed to have paid out all their distributions but still have a considerable amount of money, and they have now been extended,” said Klein.

According to Callan, Abbott’s ACE Fund VI fund has a NAV of $36 million. Marin County has paid in $99.5 million and has received $156.2 million in distributions.

About half of the remaining 400 companies in Abbott’s Fund VI are in venture capital and growth equity funds, according to remarks made at a previous Marin County investment committee meeting.

According to Abbott, the life of ACE VI will extend into 2025. Marin County voted against the term extension at an investment committee meeting earlier this year.

Sean Long, a director at Abbott, said ACE VI’s venture capital and growth equity investments would see a discount of between 25 percent and 40 percent of their NAV if sold on the secondaries market.

“We don’t think that’s representative of what you could ultimately get,” Long said.

Long added that Abbott’s strategy was to bring the NAV of Fund VI down to between 2-4 percent of the total NAV of Marin County’s private equity portfolio before engaging in a secondaries sale.

According to Callan, ACE VI currently comprises more than 10 percent of the portfolio’s total NAV.

Abbott was also working on ways to get capital back to Marin County during the extended term of ACE VI, Long said. Long did not provide any details about how Abbott intended to do so.

Valerie Ruddick, a managing director at Pathway, said the remaining investments in its 2008 fund would sell for between 60-70 percent of their combined NAV on the secondaries market.

“We don’t expect to see any material distributions until the market stabilizes some time next year,” Ruddick said.

Fees and doubts

Klein and other committee members said they were concerned about paying fees on the term extensions for both fund-of-funds.

Abbott and Pathway both charge a management fee based on the NAVs of their fund-of-funds during the extended terms, according to the committee’s discussion. During the initial term of the fund, both managers charged management fees on their invested capital.

The NAVs of both fund-of-funds should reflect the prices their underlying GPs would get on the secondaries market, Klein said.

“If you marked the NAV down to what the market is telling you, it would reduce our fees. And when you do get exits at the optimistic values you have, then we all have a nice surprise,” Klein said.

Abbott reduced its management fee by more than 50 percent during the term extension, according to Long. Pathway estimates that Marin County will pay $76,000 in fees during the term extension after the manager also lowered its rate.

Long said charging a management fee based on NAV aligned the interests of both Abbott and Marin County, as the system will pay less in management fees as exits are realized and NAV drops.

But some committee members disagreed with Long’s assessment.

“We’re paying you to wait,” said one unidentified investment committee member.

According to Callan, Marin County has paid $10.1 million in fees and expenses to ACE VI since its inception through the end of 2022. The system has paid $11.2 million in fees and expenses for Pathway’s 2008 fund-of-funds.