The chairman of Los Angeles City Employees’ Retirement System‘s investment committee expressed skepticism at the idea that private equity will perform better during the market decline due to coronavirus.
“One could argue that today the private equity market is underwater far more than we think,” Sung Won Sohn said at the pension’s meeting on June 9. “If you look at the public market, the stock market is rewarding companies with a strong balance sheet, with liquidity. And if you look at many of the private equities, they may not have as strong a balance sheet as some of the public companies. They may not have the [same] liquidity as some of the public companies.”
Sohn was responding to a comment from Kevin Novak of NEPC, the pension’s investment consultant. During a review of LACERS’ overall first quarter performance, Novak said the private equity portfolio had “outperformed” other asset classes relative to its benchmark, the Russell 3000 stock index plus three percentage points. Usually, that was a “headwind” for LACERS’ private equity portfolio, but marked returns for the portfolio outperformed its benchmark by almost 24 percentage points this time.
“There’s just an inherent mismatch in terms of benchmarking your private investments to a public markets equivalent because of the lag in valuations on the private side versus the daily market-to-market dynamic on the public side,” Novak said.
The process of valuing private equity assets is complicated and labor-intensive, as Buyouts has reported. One of the greatest challenges facing LPs during the coronavirus crisis is having confidence in the valuations of their private equity holdings.
Sohn, an economics professor and retired banker, said nobody really knew what the values of private equity holdings were, so it was not correct to say the portfolio had “outperformed.” He added that the asset class could even have deeper problems than the public markets.
“If I have to make a choice, I would say maybe because of the balance sheet issue, and the liquidity, we may have actually more problem in the private equity market than we do in the public equity market, which has liquidity,” he said.
Novak agreed with Sohn’s assessment, saying he was pointing out how the quarter-long reporting lag for private equity assets can affect apparent results. He said private equity valuations will play out over “a number of quarters,” echoing comments from LACERS’ private equity consultant, Aksia TorreyCove, at another recent meeting, which Buyouts reported.
Earlier in the meeting, chief investment officer Rodney June announced the fund was valued at $18 billion, after falling as low as $15.1 billion as the market dislocation hit. Sohn warned that could be deceptive.
“A short time ago, we celebrated how well we’ve done, how far we have come back from the bottom,” Sohn said. “That is to some extent true, but…if we were to liquidate private equity and real estate, I would argue that we have probably lost far more money than we think we have.”
June declined to comment for this story. Sohn and Novak did not respond to requests for comment.
In a recent presentation, Aksia TorreyCove reported that LACERS’s private equity portfolio was valued at $2.1 billion as of December 31, 2019.
Action Item: read the June 9 NEPC presentation to LACERS here.