LACERS: PE cash flows may turn negative in next 3 years

  • $14 bln pension enjoyed five years of positive cash flows
  • LACERS committed roughly $1 bln to PE from 2013 to 2015
  • LACERA, Louisiana Teachers’ also seeing depressed cash flows

Count Los Angeles City Employees’ Retirement System among the growing list of public pensions projecting reduced distributions from their private equity portfolios.

“With the increase in the exposure target and commitment pace in 2013-2015,” the portfolio is likely to “revert to a negative net cash flow profile in the next three years,” a Portfolio Advisors report included in the pension’s June 16 meeting materials said.

Like many investors, LACERS saw a prolonged period in which fund managers returned more cash than they called for new investments. The five-year era of positive cash flows peaked in 2013 when the $14 billion retirement system’s PE portfolio netted almost $180 million in positive cash flows.

LACERS’s cash flows narrowed to $58.3 million in 2014, the Portfolio Advisors report showed. In 2015, the gap between capital calls and distributions slimmed to $20.7 million.

Portfolio Advisors, which advises LACERS on its private equity investment pacing and portfolio construction, attributed the declining distributions to the evolution of the pension’s portfolio in the years following the financial crisis.

After committing to new funds at a strong pace in the years leading up to the financial crisis, LACERS’s annual allocations to PE funds fell in 2009 and 2010, limiting its exposure to investments from that era.

The pension’s allocation pace rebounded between 2013 and 2015. In the past three years, LACERS earmarked roughly $1 billion for PE, more than in any other three-year period in its history, according to pension documents.

Investments made through those vintages are likely still being placed in new deals and are unlikely to generate significant cash flows for some time.

Other public pensions are readying their PE portfolios for similar scenarios.

In early June, Teachers’ Retirement System of Louisiana disclosed that its PE fund managers spent $113 million more than they returned through the first 10 months of its current fiscal year. Los Angeles County Employees Retirement Association also projects its PE portfolio will be cash-flow negative this year.

Larger LPs are beginning to feel the effects as well. Florida State Board of Administration’s $8.5 billion private equity portfolio netted a record $737.7 million in cash last year. Even so, “over the near term we expect contributions and distributions to contract slightly and remain slightly cash flow positive,” Florida staff wrote in a recent presentation.

Other industry observers also projected a slowdown in exit activity in the near term. Public-market volatility in early 2016 hurt firms’ ability to sell or take public their remaining portfolio companies.

Furthermore, distributions are likely to fall as many GPs sell off the glut of assets acquired in years prior to the global financial crisis, Bain & Co said in its 2016 PE annual report.

“As the slower pace of investments feeds through to fewer exits and smaller cash distributions flowing back to LPs, the PE industry should settle into a more sedate new normal next year and beyond,” according to the Bain report.

Action Item: The Portfolio Advisors report: