“If this was my money, and it wasn’t [the money of] an institution that needs to maintain asset allocations and price and asset diversification, I would overweight to private equity,” Fann said during LACERS’ board meeting Tuesday, which was conducted via teleconference. “But I also recognize that you are a public pension fund and you have to stay within your guardrails.”
Fann was responding to a question from board member Sung Won Sohn about what level of private equity allocation was appropriate given the market volatility.
Private equity had several advantages, Fann said. Market dislocations cause valuation distortions that private equity can capitalize on better than most other forms of investment. As well, PE firms can more easily make operational improvements to companies, he said.
“They can buy businesses, they can restructure it without having to report quarterly earnings, they have the ability to combine businesses more readily than a lot of other companies or corporations,” he said. “And finally … private equity is able to exploit the capital structures and the available stability of the marketplace or instability of the marketplace, depending on risk-reward, to its advantage.”
Fann also said his firm saw opportunities in secondaries, but now “there’s a fair amount of price discovery going on.” Jeffrey Goldberger, Fann’s colleague, said at the same meeting the market dislocation’s impact on private equity valuations would not be completely clear until August or September, as Buyouts reported.
Fann said the opportunities would mostly abound in funds with holdings in retail and hospitality-based companies.
“Some of the limited partners in these funds will be forced sellers,” he said. “I think high-net-worth family offices, small institutions, endowments, [and] foundations are all potential sellers of assets, especially if the crisis prolongs. And if there’s a second wave of the crisis, we think there will be additional pressures.”
Fann added that Aksia TorreyCove has been in discussions with LACERS CIO Rodney June and his staff about one emerging manager’s secondary strategy. He also said June had asked him to look for distressed debt opportunities. Last month, June said LACERS staff was interested in that asset class, as Buyouts reported.
Aksia in January acquired TorreyCove, a consulting firm Fann co-founded and where he served as president and chief executive officer.