Despite distribution lag, LA Water pension opens the taps for PE

LPs have grown increasingly worried about distributions as the slow exit market reduces the amount of cash flowing back into their coffers.

Slower distributions mean less capital in LPs’ hands for things like re-upping to existing relationships or committing to funds from emerging managers. Without money flowing back to LPs, the whole natural cycle of private equity is disrupted.

One pension, however, doesn’t seem to be impacted by the lack of distributions flowing into its program.

The private equity portfolio of Los Angeles Water and Power Employees’ Retirement Plan, an under-the-radar retirement system, paid $1 billion more in contributions than it received in distributions since the system began allocating to private equity in 2006, according to its 2023 private equity pacing plan. Consultant StepStone projects that LA Water’s private equity portfolio will start to generate positive cash flow this year and in the years ahead.

The 2023 private equity pacing plan, presented by StepStone, was detailed at the $19 billion system’s March 8 board meeting. Buyouts reviewed the private equity pacing plan, along with other documents available on the system’s website. Spokespeople for LA Water and StepStone declined to comment.

Despite this deficit, the system is full-speed ahead on PE, planning on committing up to $525 million in 2023, according to its latest private equity pacing plan.

LA Water averaged $380 million in annual commitments from 2017 through September 2022, monitoring reports show. Nearly 75 percent of the system’s commitments made since the program’s inception were made to funds with vintage years between 2017 and 2022, according to reports.

LA Water’s private equity portfolio’s performance appears healthy, with a total value of over $3 billion. At the end of September 2022, the system reported a net internal rate of return of 15.2 percent for the 56 funds it holds.

While some systems are downshifting their pacing for PE, and others are considering pausing their programs, some are sticking with their models to try and get outperformance in the down market. One lesson learned after the GFC was that those systems that kept committing even in the face of enormous fear were rewarded with exposure to strong vintage performance. LA Water seems to be taking that lesson to heart.