LACERA gets better terms for second co-investing fund

The Los Angeles County Employees Retirement Association has re-upped into an interesting structure for its exposure to co-investments and was able to negotiate some friendly terms in today’s “competitive environment,” sister publication peHUB reported.

The system has re-invested $300 million into a separate account program for co-investing managed by Morgan Stanley. LACERA launched the program with Morgan Stanley in 2006 through a vehicle called GTB Capital Partners. Earlier this month, the pension system re-upped into GTB Capital II. Deal flow comes from LACERA’s portfolio, as well as transactions sourced by Morgan Stanley.

But the re-up is a bit different this time. LACERA was able to negotiate down some of the fund terms in exchange for its re-up. The management fee in Fund I was .85 percent of the full commitment during years one through five, and the carried interest was 10 percent. The fee in Fund II is .60 percent, which steps down to .30 percent after the four-year investment period, according to public documents from LACERA.

Carried interest on Fund II will be 7.5 percent over an 8 percent preferred return, increasing to 10 percent if performance exceeds a 15 percent net IRR, the documents said.

Under these terms, total management fees over 10 years would come to $12.6 million, compared to $15.9 million over 10 years on Fund I.

Morgan Stanley is committing 1 percent alongside LACERA’s commitment, and a LACERA investment officer will serve as an observer on the investment committee for Fund II, according to the documents.

The pension system believes performance on Fund I has been strong, though there is some concern about the total loss of one investment, the documents said. As of 31 December, 2012, Fund I had invested $263.6 million in 18 companies. The portfolio generated $139.6 million in distributions and reports a net asset value of $263.4 million. The net IRR is 9.8 percent and the net multiple is 1.4x.

Five investments in the fund were made in 2007, and the largest individual investment, of $18.4 million, was made in 2008. One investment of $13.6 million was completely written off, while five mature investments representing about $55 million were written down, the pension said.