Private equity: Arizona’s ASRS argues the case for secondaries

Arizona State Retirement System (ASRS) is seeking opportunities to buy private equity assets in the secondaries market.

ASRS’s $8 billion private equity allocation is focused on the upper-mid and lower-mid market where it mines a sweet spot of market inefficiencies and room for operations improvement. It also runs a growing co-investments program where it is on track to invest 30 per cent of the portfolio with deal flow from GPs as well as from other managers via a separately managed accounts.

That strategy is now complemented by a push into secondaries where ASRS has created another SMA and committed $250 million to invest exclusively in stakes being offloaded by other LPs using a portfolio construction that aligns with its overall strategy and sector focus.

Speaking during the fund’s December 2025 investment committee meeting, deputy chief investment officer Samer Ghaddar argued the case for investing in secondaries where buyers can pick up assets at a discount from sellers who are keen to offload a full basket of assets and where the money is already put to work and in the ground.

Secondaries buyout investments offer compelling long-term growth potential along with favourable cash-flow characteristics, he said, adding that the opportunity has spiked off the back of the rise in continuation vehicles which many GPs approach as an exit opportunity.

“We want to take advantage of GP and LP-led CVs to try and capture this dislocation,” Ghaddar told the investment committee.

Private equity is not overestimating the NAVs

The discussion also touched on investor concerns around whether the NAV of private assets represents true asset value – something that is only revealed at exit. Ghaddar pointed to recent findings that found 76 per cent of exits are higher than their reported NAV.

“We are super confident that private equity is not overestimating the NAVs. No GP wants their numbers to be taken down – they want them taken up, so they are very conservative on pushing up these NAVs.”

Europe accounts for 25 per cent of ASRS’s private equity benchmark. Now Ghaddar expects the portfolio to flip slightly more in favour of Europe where opportunities are opening up in a dislocation that could replicate private equity success in the US.

“We have partnered with a group of managers on direct co-investments across Western Europe,” he said.

Strategy is honed around partnering with specialist managers within technology, healthcare, and industrials, which all benefit from strong, secular growth trends. If single-sector specialists are not accessible, ASRS turns to multi-sector managers, but only where these possess specialist teams with extensive sector expertise. The team also favours managers which focus on value creation operationally rather than depending too heavily on financial engineering and managers.

Headwinds in private equity include unknowns around Federal Reserve policy and the inflation outlook; a difficult fundraising environment, and longer timelines from fund launch to close that are weighing on managers’ ability to raise and deploy capital efficiently.

Still, meaningful tailwinds are also supporting the asset class like the fact that public market valuations remain elevated and continue to trade at a substantial premium to private markets. Additionally, trustees heard that acquisition multiples across many buyout segments have compressed relative to their peak three years ago, creating more attractive entry points for investors.

The recent pickup in M&A activity also reinforces this improving backdrop, and offers another encouraging sign that deal flow is strengthening. The committee also referenced another tailwind in the guise of the democratisation of private equity as the asset class is increasingly found in the portfolios of to high net worth investors, amongst others, meaning that GPs are not just reliant on institutional money. [See Litigation, fees and structures: Why 401(k) plans won’t jump into alts, yet]

Tactical reduction in public equity

ASRS recently tactically reduced its public equity allocation in response to stretched valuations and concerns of what Ghaddar called a “crack in the system”. The fund, which has a target 44 per cent allocation to public equity, lowered its exposure by 2 per cent, equivalent to $1.2 billion, in a  rebalance that will go to fixed income.

The tactical committee meets every month and has been vocal on the risk of today’s high valuations since October.

Public equity returns over the one-year period hit 17 per cent.

Arizona runs an enhanced indexing strategy that takes very little active risk in the portfolio. Strategy is focused on compounding a small excess return, targeting a 25 basis points out performance for the asset class that equates to around $70 million in value add above the benchmark returns each year.

The public equity benchmark is two-thirds US equity and one-third international – ASRS doesn’t invest in China or Hong Kong stocks.

The US remains a core focus, however trustees heard that Europe offers meaningful opportunities for diversification and for narrowing the gap in both exposure and performance. Two-thirds of the $29 billion portfolio is managed in-house; tech stocks make up the majority of the benchmark and Cole Smith, senior public equity portfolio manager noted that although AI fatigue set in in 2025, the portfolio is still benefiting from strong corporate earnings each quarter.

“Sharp corrections can happen when the market is this rich. Earnings are the biggest driver of equity markets so it bodes well,  but we’ve seen the third consecutive year of double digit growth in equity in 2025,” he said.