LA Fire and Police lowers benchmark for PE performance

  • New benchmark drops expected premium over public-equity benchmark to 2.5 pct from 4.5 pct
  • Investment staff previously had authority to commit up to $25 mln to PE funds
  • $23 bln system has 9 pct actual allocation, 12 pct target

Los Angeles Fire and Police Pensions adopted an investment policy that lowers its benchmark for private equity investments and eliminates investment staff’s ability to make PE investments without board approval.

Rather than measuring performance against a benchmark of the S&P 500 plus 4 percent, the pension fund will measure PE against the S&P 500 plus 2.5 percent.

The new benchmark is based on recent trends toward lowering capital-markets return assumptions, and reflects the fact that the PE benchmark should be periodically reevaluated and adjusted, the pension fund said.

The pension also eliminated a secondary benchmark of consumer price index plus 15 percent, which has “fallen out of favor with institutional investors,” according to LAFPP.

LA Fire and Police isn’t the only pension fund to lower its PE benchmark. CalPERS also recently changed its benchmark, effective July 2018, reducing the premium it expects to receive over a global equity benchmark.

CalPERS previously used a benchmark that added a 3 percent premium over a blended FTSE benchmark that weighted U.S. equities at 67 percent and global non-U.S. equities at 33 percent.

The new benchmark for the $359 billion pension fund is the FTSE Global All Cap Index plus 1.5 percentage points, based on expectations of a lower spread between global public equity and PE.

LAFPP’s new policy also formally requires all PE investments to receive board approval. The $23 billion pension fund previously allowed its staff to make commitments of up to $25 million through delegated authority.

CIO Tom Lopez said the updated policy was already in practice at the pension.

“The change was approved, but the change to the policy was to bring it into alignment with what the board had already done,” Lopez said. “The board removed the authority over a year ago. The board decided that all private equity investments would go through them for approval.”

The new policy also caps PE investments at $50 million per partnership.

The pension fund maintained its 12 percent target for PE but adjusted its targets for sub-asset classes. LAFPP had a 9 percent actual allocation to PE as of July 31. Its portfolio is divided into buyouts, which represent 48 percent of the portfolio, special situations, 28 percent, and venture capital, 25 percent.

The policy raised the pension fund’s allocation to buyouts to 20-60 percent from 20-40 percent, while maintaining VC and special-situations targets at 20-40 percent each.

The policy also clarified its emerging-managers policy, defining them as managers raising their first through third funds.

Action Item: Visit the pension fund’s website here