Los Angeles County pension committee approves expanded co-investment options

The $57.8bn pension's staff says they have $100m in dry powder left to co-invest this year and may ask for more.

A Los Angeles County Employees Retirement Association committee approved a staff request to increase its funnel of possible co-investment deals after finding its options constricted during the coronavirus market dislocation. The proposal now awaits approval by the full board.

At its Wednesday meeting, the Equity: Public/Private Committee of the LACERA Board of Investments voted to allow staff to co-invest alongside managers approved by StepStone Group, its private equity advisor, in addition to board-approved managers and board-approved discretionary PE managers. The proposal also adds managers approved by Morgan Stanley to the approved deal funnel.

Last year, the board approved an expansion to the discretionary managers, as Buyouts reported, which led to staff bringing in Pathway Capital Management and JPMorgan Chase  & Co., adding their approved managers to the deal flow. This led to a 300 percent increase in the number of managers approved for possible co-investments.

But because the coronavirus crisis caused a freeze in deal flow, the amount of actual co-investments LACERA has seen has gone down – from 20 in 2019 to only eight as of June 2020, a 20 percent drop, or “a little over one a month,” said senior investment officer David Chu.

To mitigate this, staff wants to consider co-investments from StepStone and Morgan Stanley’s approved managers in the hopes of being able to take advantage of more opportunities provided by the downturn.

Chu’s presentation noted that economic downturns were an attractive time to make co-investments and this would give the $57.8 billion pension access to more deals.

“We really believe this helps LACERA increase its optionality and improve the quality and quantity of deal flow that we’ll see in this environment,” Chu said.

Equity committee chair Herman Santos asked Chu if investment staff needed more capital to be able to deploy. Chu said staff had a $150 million limit for the year, and $100 million in dry powder, which was sufficient. If staff needed more, Chu said they would ask at the pension’s next full-year structure review, set for November.

“We’d like to see if that’s enough and if not we can come back and ask for a little more capital,” he said.

“I just don’t want to miss any opportunity because we handicapped the CIO and the staff’s ability to deploy the funds,” Santos responded. “So, I look forward to that recommendation.”

The committee voted unanimously to advance the new policy to the full board. It did not come up during Wednesday’s open session of the full board. LACERA did not respond to a question about when the full board would vote on the policy. The board went into executive session Wednesday afternoon.

Action Item: view the agenda from LACERA’s July 8 Equity: Public/Private Committee meeting, including the presentation on co-investments, here.