Q&A: LACERA on buying in the secondaries market

Los Angeles County Employees Retirement Association has led the way among US public pensions in its embrace of the secondaries market.

In December 2018, the $60 billion pension closed the sale of a $1 billion, 61-fund portfolio of mainly tail-end stakes to Blackstone’s Strategic Partners unit, cutting its number of GP relationships from 107 to 78. Greenhill led the deal with Evercore and Campbell Lutyens also taking a place on the “bench” for potential future sales.

Over the following year it formulated plans to allow chief investment officer Jonathan Grabel to spend $200 million on secondaries purchases, $130 million on single fund positions and $150 million on non-US interests without the need for board approval – all double the previous limits. These plans were formally approved in November.

According to documents from LACERA’s 9 September meeting, in 2019 the pension wrote a $60 million cheque towards a $1 billion single-asset restructuring involving Revelstoke Capital Partners and a $16 million cheque towards the $1.4 billion restructuring of Accel KKR III, which won sister title Private Equity International‘s award for Secondaries Deal of the Year in North America.

Secondaries Investor caught up with the pension’s private equity investment team, led by principal investment officer, alternative assets, Christopher Wagner.

What criteria are you using to decide which GP-led secondaries deals to back?

We generally look for several things which includes: strong GP-LP-management team alignment, where a significant portion of the transaction proceeds are rolled-over by the sponsor and management team into the continuation vehicle; additional GP or management team investment beyond any rollover amounts is viewed very favourably.

[We also look for] high-quality businesses with robust historical growth, high margins and demonstrated track record of out-performance, sustainable and defensible business models, and sponsor fit – if the deal type is in the GP’s strike zone.

Are you actively considering investing in any GP-leds over the rest of 2020, now that the market has picked up?

Yes, dealflow has picked up significantly and we are evaluating various opportunities.

The recent meeting docs point to LACERA launching another secondaries sale. Can you give an idea of how much you might look to sell?

We are not actively considering secondary sales at this time.

When intermediaries contact you about GP-led deals, what are some of the do’s and don’ts?

Whether we are leading or not, we generally look for the same investment characteristics. On a syndication, we do appreciate it when intermediaries bring us in early. Given our cheque size – staff can commit up to $130 million without board approval – we would like to have the ability to influence terms when appropriate and perform proper due diligence.

LACERA is the largest county retirement system in the US with more than 156,000 members. It has a 10 percent allocation to private equity, equivalent to $6.52 billion, as of 9 September.