LACERS staff to recommend commingled fund co-investments

The recommendation is that the pension fund use a commingled fund investment as a first step towards building up its co-investment capability.

Los Angeles City Employees’ Retirement System’s staff will recommend the $18.87 billion pension kick off its co-investment program by investing in commingled funds, according to a presentation set to be delivered to its board next week.

Staff will suggest LACERS designate up to 10 percent of each year’s private equity commitments for co-investing. The goal would be to invest between $25 million and $50 million with “one or two” top-quartile managers.

LACERS has been aiming to get into co-investments for some time. Private equity consultant TorreyCove Capital Partners has been educating the board on various options for a potential co-investment program, as Buyouts reported.

The staff presentation focused on five possible courses of action, ranging from investing in commingled funds to completely in-house management of co-investments.

The advantages of investing in commingled funds included access to investments with GPs with whom LACERS has not previously invested, abundant dealflow, a dedicated team overseeing the co-investment fund and diversification of assets. The disadvantages are higher prices and being limited to only the co-investments chosen by the fund. Commingled co-investment funds usually have a 1 percent management fee, 10 percent carried interest and 8 percent preferred return.

Staff also recommended that if the commingled fund investments “deliver consistent risk-adjusted returns with a lower fee structure,” LACERS should proceed to the next option in the range of co-investment opportunities: a separately managed account.

That step would require both larger commitments – as high as $200 million – but also require an update to the pension’s current investment policy. The investment policy defines co-investments as “direct investments made alongside a partnership.”

Staff said some other public pensions had approached launching a co-investment program in the same way.

“Peer choice of approach was influenced by risk appetite, staff size and skill set, and the size and history of their private equity program,” staff said in the presentation.

Staff said it assembled the report from reviewing academic research and industry studies, discussion with peer public pensions and meetings with potential managers.

LACERS’ board meeting is scheduled for Tuesday, March 10.

Private equity performance

As of December 31, the LACERS master trust was valued at $18.87 billion, with $2 billion of that (or 10.72 percent) in private equity.

According to a separate presentation set to be delivered by general investment consultant NEPC, the private equity returns as of the end of 2019 were significantly below benchmarks. Net of fees, one-year returns were 6.28 percent, three-year returns were 12.72 percent, five-year returns were 10.42 percent and 10-year returns were 12.7 percent.

The system’s benchmark is the Russell 3000 plus 3 percent. Its numbers for returns were 34.86 percent over one year, 17.97 percent over three years, 14.55 percent over five years and 17.06 over 10 years.

LACERS did not respond to a request for comment.

Action Item: read the LACERS March 10 meeting materials here.