LACERS sets 2022 strategic plan for private equity

The pension system increased its PE target allocation to 16% and plans to ramp up its new, in-house co-investment program.

After hitting most of its goals in 2021, Los Angeles City Employees’ Retirement System has approved and adopted a strategic private equity plan for 2022, as it is trying to reach its new private equity allocation of 16 percent.

The plan was put together by Aksia, LACERS’ PE consultant.

LACERS is riding a trend as pension plans across the country are increasing their allocations to PE. “Venture and growth equity have outperformed buyouts and public equity over all time horizons,” said Wilkin Ly, director of private market assets at LACERS. “All private equity strategies outperformed public equity over 3-year and 5-year time horizons.”

Ly also said that over the 1-year, 3-year and 10-year time periods as of March 31, 2021, US private equity outperformed both Europe and Asia/Pacific. And over the 5-year time period, as of March 31, European private equity outperformed both the US and Asia/Pacific.

Global exposure is something that LACERS will be looking to increase in 2022, as 79 percent of the fund commitments in 2021 were in North America, with an 81 percent underlying exposure in North America. “Adding international exposure can improve diversity in LACERS PE portfolio without sacrificing expected return.”

Currently, the LACERS portfolio is underperforming in the 1-year mark by 5.8 percent. It is, however, up by 2.6 percent in the 3-year mark, 0.8 percent 5-years out and outperforming at the 20-year mark by 3.5 percent.

LACERS had a good year in 2021, with a total of $564 million in total commitments through June 30, as the initial pacing recommendations at the beginning of the year ranged from $675 million to $750 million.

As of March 31, the aggregate portfolio’s fair market value of $3.1 billion represents 14.6 percent of total plan assets.

Since inception in 1995, LACERS has committed more than $5.8 billion to private equity and at the current target of 16 percent, the target exposure to private equity is roughly $3.4 billion.

“Legacy exposure (1998 through 2011) accounts for roughly 15 percent of LACERS total private equity exposure,” said Ly. “The bulk of LACERS current private equity exposure (61.7 percent) is from funds with vintage years from 2012 through 2017.”

He also noted that the performance of public markets in the last two years has contributed to LACERS being underweight in PE, hence the updated pacing plan has LACERS hitting its 16 percent target by 2025 with an assumed 4 percent total plan growth.

Legacy drag

There are some weaknesses in the portfolio however, according to the Aksia presentation.

“LACERS has an overdiversified private equity portfolio, with a large enough number of relationships that returns may exhibit reversion to the mean,” according to presentation slides. “The LACERS staff continues to explore reducing the number of funds in the portfolio as well as increasing allocation sizes to core funds.”

The slides also indicated that the legacy portfolio will continue to be a drag on performance, including the specialized portfolio, “until those funds either run off or get sold in the secondary market.”

“The secondary market has evolved to the point that it can be viewed as a potential investment as well as a portfolio management tool to help reduce the number of funds in the portfolio and overdiversification,” Ly said.

The newly developed co-investment program also needs to be activated. “Pursuing co-investments in-house and through third parties, can increase exposure to core GP’s while simultaneously helping to mitigate costs,” said Ly.

The strategic plan of pacing in 2022 calls for maintaining consistent incremental increases in annual commitments until LACERS reaches its private equity target of 16 percent.

There is a proposed commitment plan of $1.375 billion for 2022, with commitments to 18 to 25 firms with a target size of between $50 million and $100 million per commitment/relationship. That should include somewhere between five and seven investments of at least 10 percent of commitments to go to various emerging managers.