LACERS opens door to secondaries trades

The $16.93 billion Los Angeles City Employees’ Retirement System’s plans to expand its private equity portfolio got a significant boost with a slew of approvals at its March board meeting.

After almost three years of discussions, LACERS’s re-up capacity increased two-and-half fold from $40 million to $100 million. Commitment capacity to new relationships doubled to $50 million from $25 million.

The pension system also expanded its emerging manager mandate by increasing the fund size limit to $1 billion from $500 million.

Importantly, LACERS will now be able to sell its partnership fund interests on the secondaries market.

The private equity commitment limits were set when the LACERS portfolio was worth $9 billion and the private equity allocation was just 5 percent, chief investment officer Rodney James said at an earlier meeting.

In the years since, the fund has grown to more than $16 billion and the PE allocation has increased almost threefold to 14 percent, he said.

Last year, the pension system increased its private equity target allocation to 14 percent from 12 percent. As of 30 June, the $1.8 billion private equity portfolio represented 10.9 percent of total assets, and generated a net internal rate of return of 11.3 percent and a total value multiple of 1.55x since inception in 1995.

The commitment amounts were “far below our peers” and limited how much LACERS could commit to top quartile GPs, James said.

Lower commitments also reduced dealflow because the best GPs are looking for fewer partners, David Fann, president and chief executive officer of TorreyCove Capital Partners, LACERS’s investment consultant, said at the same meeting.

Larger commitments also increase the ability to negotiate lower fees, Fann noted, as well as greater transparency, a seat on the Limited Partner Advisory Committee and favourable side letters, which all afford better governance.

The new commitment levels will enable LACERS to be a meaningful partner and trim its GP relationships, a source close to the fund said.

LACERS has been consolidating its GP base; of the $317.5 million it committed to PE in 2018 as of 30 September, all were re-ups except for $10 million to Mill Point Capital Partners, a new relationship for the pension system.

However, LACERS may not be able to get larger commitments to preferred managers because of intense competition, the source said.

For instance, LACERS was only able to get a $30 million allocation in Thoma Bravo’s Fund XIII and $25 million in its Fund XII, despite the ability to commit up to $40 million to each, according to the source.

LACERS did not shed more light on its plans to sell on the secondaries market, but its private portfolio was grouped into a $132.4 million “mature” bucket of 1995-2006 vintage funds that had little potential for growth; a $555 million “maturing” bucket of 2007-2011 vintage funds where the bulk of distributions were expected; and a $1.144 billion “developing” bucket of 2012-2018 vintage funds, for which the bulk of contributions were expected. With the exception of 2016, annual portfolio distributions have outpaced contributions since 2011.

LACERS’s private equity portfolio consists of buyouts, growth equity, venture capital, credit/distressed, natural resources and others, and had 247 funds from 121 fund managers as of 30 June, a TorreyCove presentation said.

Buyouts represented almost 53.4 percent of the PE portfolio and generated an IRR of 12.4 percent; growth equity represented 12.8 percent and generated an IRR of 11.7 percent; and venture capital represented 15 percent of the PE portfolio and generated an IRR of 7.5 percent, as of 30 June.