LACERS PE adviser suggests venture pullback, buyouts boost

TorreyCove's recommendations are partly tied to fears of a market downturn and poor performance by some of venture managers.

Los Angeles City Employees’ Retirement System’s private equity adviser TorreyCove recently suggested the $18.38 billion pension up its allocation to buyouts and cut back on venture capital, according to two recent presentations to the board’s investment committee.

In a new presentation given Tuesday, TorreyCove told LACERS’s investment committee its recommendations are at least partially tied to fears over a coming market downturn and poor performance by some of its venture managers.

As of June 30, venture made up 13.3 percent of the total LACERS private equity portfolio, with 4.3 percent in early-stage venture, 3 percent in late stage and 6 percent in multi-stage. TorreyCove recommended a long-term target of 5 to 15 percent and a 2020 tactical weighting of 5 to 10 percent.

On Tuesday, TorreyCove showed the investment committee the venture and growth equity returns as well as the buyouts returns split into small, medium and large, all as of June 30.

One-year venture returns were 20 percent, three-year returns were 14.1 percent, five-year returns were 10.5 percent, 10-year returns were 11.2 and since inception it had returned 8.3 percent.

A TorreyCove staffer told the committee these numbers were “relatively weak” and that its late and multi-stage venture managers were largely responsible.

TorreyCove’s presentation was not hopeful about the outlook for venture, either, citing a 2019 McKinsey & Company private markets report that stated several challenges to the asset class. These included a wide dispersion of returns, difficulty accessing best-in-class managers, a decade of torrid growth in the industry and worries that the “run-up” in valuations for venture companies is unsustainable, making adding exposure unwise near the end of the market cycle.

The presentation also noted several disappointing recent IPOs of venture-backed companies, including Uber, Lyft and Slack.

TorreyCove, in a separate presentation given last month, said: “LACERS’s exposure to buyouts is at the lower end of TorreyCove’s recommended long-term target, while exposure to venture capital is near the high end.”

As of June 30, buyouts made up 56.4 percent of LACERS’s private equity investments, with 22.5 percent in large buyouts, 29.9 percent in medium buyouts and 4 percent in small buyouts. TorreyCove recommended a 50 percent to 65 percent long-term target for buyouts and a 55 percent to 70 percent 2020 tactical weighting for the category.

Small buyouts was actually the worst-performing category of the portfolio, a TorreyCove employee told the board. But medium buyouts performed “solid” and large buyouts were strong over time.

The November report said buyouts give managers more control over underlying investments and also allow larger pensions like LACERS to invest at scale. Buyout funds also tend to have their best returns in vintage years when public markets are at their peak, the report said.

TorreyCove also recommended LACERS explore co-investment opportunities as well as a possible secondary sale. TorreyCove and LACERS staff are in the process of developing these policies and will give more information at the next meeting, they said.

Action Item: Read TorreyCove’s October and November presentations to the LACERS investment committee here.