LACERA CIO: pension learned from 2009 crash, will not back away from PE in crisis

Los Angeles County Employees Retirement Association has no plans to change its private equity pacing amid the coronavirus crisis, its chief investment officer wrote, applying lessons it learned during the 2009 financial crisis.

In a letter to LACERA’s investment board of trustees dated March 23, CIO Jonathan Grabel said LACERA made a mistake when it suspended private equity fund commitments as the global financial crisis played out.

“Looking back, LACERA would have been better served maintaining a consistent investment pace,” Grabel wrote. “The 2009 vintage year has been one of the best performing vintage years in private equity over the past two decades. Though we cannot predict the duration and severity of the covid-19 pandemic, we can learn from the past and sustain our deployment pace in both good markets and bad.”

At the same time, Grabel said LACERA has “expanded its investing capabilities” through the execution of “several co-investments and secondary purchases.” LACERA did not respond for details of the secondaries purchases or co-investments.

The board recently increased the amount Grabel could spend on secondaries purchases without board approval and widened its options for potential co-investment partners, as Buyouts reported.

Grabel said this could enable the pension to access investments likely to “outperform” in the current conditions of the market, pointing out consumer staples and healthcare as potential options. He also wrote that 2009 was a “great time” to buy secondaries and that the window of opportunity only lasted about a year.

“Thus, only those investors who were nimble and able to recognize that these discounts were driven by limited partner-specific issues, rather than portfolio impairments, were rewarded,” he wrote.

Grabel wrote that investment staff planned on “opportunistically scanning the private equity landscape” for “equity exposures that are either mispriced, difficult to find, and/or unavailable in public markets.”

LACERA’s private equity portfolio was “relatively well-positioned for a short to medium-term downturn,” Grabel said. He noted the portfolio is overweight in information technology, but that many of these investments were in products that were “mission critical” to customers’ organizations.

LACERA will continue its preference for sector specialists, Grabel said. Also, the pension would take a “renewed interest” in “distressed, special situations or value-oriented managers who have demonstrated an ability to invest capital during past dislocations,” he said.

As of February, LACERA’s total fund was valued at $58.8 billion, with $6.4 billion in private equity. The PE portfolio’s actual allocation was 10.9 percent of the total fund value versus a 10 percent target.

The fund’s cash allocation more than doubled since the end of 2019, totaling $2.4 billion. Many LPs, including Los Angeles City Employees’ Retirement System and Los Angeles Fire and Police Pension System, increased their cash allocations to have liquidity on hand to meet pension obligations as well as increased capital calls.

Cash now makes up more than four times its 1 percent target allocation, at 4.1 percent as of February. LACERA did not respond to a request for comment on this.

Action Item: read Jonathan Grabel’s March 23 letter to LACERA’s investment board of trustees here.