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LP Scorecard: LACERA bet big on PE before financial crisis

  •  Before the financial crisis, LACERA invested large commitments into an abundance of private equity funds
  •  Union Square Ventures 2004 realized an IRR of 68.4 percent and investment multiple of 14.1x
  • Candover 2005 Fund performed poorly, with an IRR of negative 9.9 percent and  an investment multiple of 0.6x

Los Angeles County Employees Retirement Association committed more than $2.6 billion to 54 private equity funds from 2005 through 2007, good for more than 20 percent of what the pension allocated in its PE program’s 30-year history.

Like many pensions, LACERA made large commitments to a record number of PE funds in the years leading up to the global financial crisis. LACERA made 21 commitments to funds in 2006, the most it had made in any year since 2000, according to pension documents.

Those commitments generated significant distributions, particularly from a handful of smaller commitments to more growth-oriented general partners. In sum, the $46.6 billion pension’s pre-crisis commitments yielded more than $2.8 billion of distributions, or $222.2 million more than total commitments from 2005 to 2008.

Union Square Ventures 2004 had the highest IRR of the LACERA funds raised during the three-year stretch, netting 68.4 percent as of September 30, 2015.

Additionally, the Union Square Ventures fund realized the highest investment multiple of 14.1x and distributed the third most amount of capital of 2005-2007 funds. LACERA’s $10 million commitment generated $113.1 million.

Funds from JMI Equity and Excellere Partners also contributed to LACERA’s success during this interval.

JMI Equity Fund V, to which LACERA committed $16.2 million in May 2005, had both the second highest IRR and investment multiple during this time, at 39.5 percent and 5.3x.

Excellere Partners’ 2007 fund, Excellere Capital Fund, generated an IRR of 33 percent and an investment multiple of 2.2x, the third highest IRR and 10th highest multiple of this time span.

Weaker performances

The fund with lowest IRR, negative 9.9 percent, was Candover 2005 Fund. The Candover Investments vehicle received $94.2 million from the pension fund but has drawn down only $30.7 million. Additionally, its investment multiple of 0.6x was the lowest of all funds during this period.

Candover was not the only firm that notched poor performance. First Reserve Corp’s First Reserve Funds XI and Intersouth Partners’ Intersouth Partners VII came in second and third for lowest IRRs, respectively.  The former, an energy fund, had an IRR of negative 7.8 percent, while the latter had negative 2.5 percent. LACERA committed to the funds in mid-2006.

In October 2008, the pension funded $94.4 million to another First Reserve Corp fund, First Reserve Funds XII, which had an IRR of negative 4.5 percent and absolute distributions of $36.7 million.

Notable winners can also be found in the pension fund’s private equity portfolio since it began. Committing $5 million to Kleiner, Perkins, Caufield & Byers’ Kleiner Perkins Caufield & Byers VII in May 1994 resulted in absolute distributions of $121.6 million and an IRR of 124.6 percent. In March 1996, it gave $9 million to Accel’s Accel V, which had an IRR of 188.4 percent and absolute distributions of $176.6 million.

As of September 20, 2015, LACERA drew down more than $11.4 billion and committed more than $12.2 billion. The adjusted reported value of the PE portfolio stands at $15.6 billion.

The pension’s allocation of 9.6 percent for private equity hits just below its target allocation of 10 percent, as of December 31, 2015, with plans to hit that target in 2016.

Action Item: LACERA’s website: http://www.lacera.com

Photo: Daffy Duck poses at the unveiling of the new U.S. postage stamp in the courtyard of Mann’s Chinese Theater on April 16, 1999, in Los Angeles. Courtesy Reuters.