Changes in the secondaries market have led Los Angeles City Employees’ Retirement System‘s private equity consultant to counsel a shift in its potential strategy away from selling assets to possible commitments to secondaries funds.
“A lot has happened in the last six months as we all know, and there has been a dislocation in the secondary market,” said Jeffrey Goldberger of Aksia TorreyCove at the LACERS board’s 25 August meeting. “Maybe this is a buyers market today versus where it was a year or two ago.”
The consultant had previously suggested possibly selling some of LACERS’ older, more “long in the tooth” assets.
Goldberger said the LACERS private equity portfolio still had “a number of non-core relationships that go back quite a while” which could be sold and the proceeds re-invested into higher-confidence managers. The market environment was better for buyers, he added.
The recommendation was not to directly buy secondaries, which Goldberger called “a heavier lift”. Instead, the pension could commit to secondaries funds, as it has done in the past. In the last few years, the amount of capital in the industry has been driving down discounts on holdings and as more LPs seem likely to sell, that has changed, he said.
“What we saw post-covid-19 is maybe the anticipation that there are going to be more sellers than buyers,” said Aksia vice-chairman David Fann. “That will cause maybe an opportunity to position ourselves as a buyer in order to benefit from their market characteristics.”
Fann pointed to university endowments as a potential source of secondaries sales, as they seek to make up for loss of tuition revenue.
Avoid missing the boat
Some board members were eager to take advantage of immediate secondaries opportunities. Commissioner Elizabeth Lee said she thought the pension “missed the boat” on secondaries sales, and hoped the same would not happen for potential purchases.
“Are we going to go miss the boat again?” she said. “We might miss out on some of the better deals.”
Chief investment officer Rod June recommended caution, saying LACERS’ investment policy needed some work before the pension was ready for any kind of direct engagement with the secondaries market.
“While [the policy] mentions we can do secondaries, it really was never well-developed because we had not traditionally done those in the past,” he said. “We really need to ensure that the policy is in place and we have proper procedures and rules and responsibilities defined, then we can move rather efficiently and quickly.”
June said staff could have an updated policy for the board to look at by November at the latest. Actual implementation would not happen until next year at the earliest.
“I don’t think there’s any rush to do anything. I do acknowledge and agree that there’s a certain timing aspect to when we get in, or when you sell your positions based on the market cycle, but we do want to be very thoughtful about this,” June said.
“In order for staff to move quickly on any type of investment, the policy needs to be constructed in a way that allows for a very efficient decision-making process. Once that’s all in place then we can move very quickly executing on various strategies.”
Board member Michael Wilkinson advised being cautious to make sure the policy framework was where it needed to be.
“We need to be very, very, very careful as we move billions of dollars around and make sure that we have all the protections in place that our plan and our members demand,” he said.
Board member Sung Won Sohn, an economist and former banker, later said he would like to see LACERS move faster on opportunities as well.
“I said many times that we have an excellent staff [and] I don’t think we are utilising them effectively, and our performance needs to improve,” he said. “I think the kind of discussion that we are having here is very positive.”
LACERS’ total fund value was $19.53 billion as of 24 August.