Los Angeles City Employees’ Retirement System may commit up to $850 million to private equity next year and also implement a co-investment program.
LPs face challenges as they consider their private equity pacing for next year in the face of multiple headwinds like rising interest rates, overallocation issues, dwindling distributions and a looming recession.
LA City investment staff and Aksia will recommend it commit up to $850 million in 2023 – focusing on 10 to 15 firms with a target size of $40 million to $75 million per commitment – at the $22 billion system’s board meeting scheduled for November 8.
The recommended 2023 pacing plan also includes the creation of a co-investment program, which would mitigate costs while increasing exposure to core GPs.
The plan also recommends LA City potentially implement a secondaries program for either investing or for selling its legacy exposure to commitments made between 1998 and 2011.
According to the presentation, 54.8 percent of LA City’s private equity exposure is to funds with vintage years between 2019 and 2022.
Aksia and investment staff also recommend LA City focus on consolidating capital with its highest-conviction managers and trimming some relationships to stem the risk of over-diversification.
LA City may also consider rebalancing some of its subsectors, particularly as it is overweight in information technology.
The plan also recommends LA City potentially invest with value-oriented, turnaround and distressed managers due to the market dislocation.
The proposed pacing plan seems to show that LA City may not be as optimistic about private equity compared with 2022.
LA City targeted $1.37 billion in commitments in 2022 but has adjusted to a “working target” between $1 billion and $1.1 billion due to market volatility, according to the presentation.
Through September, the system committed $787 million to private equity, according to the presentation.
The presentation addressed some of the challenges that faced private equity in 2022 and could impact the market next year.
The denominator effect, caused by the months-long lag time of private equity valuations that boost the asset class’s share of a total fund as public markets slip in value, caused some LPs to tighten allocations this year, the presentation said.
This may extend fundraising cycles and cause some managers to not hit targeted amounts, according to the presentation.
LA City currently allocates 18.2 percent of its total fund to private equity, above its target of 16 percent, the presentation said.
The LA City board must approve the proposed 2023 before it can be implemented.
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