LP Profile: Los Angeles County aims to diversify portfolio

The Los Angeles County Employees Retirement Association spent the last several years building a private equity portfolio with plain vanilla buyout funds, committing heavily to large and middle-market vehicles managed by established domestic managers. Now, the $47.7 billion pension wants more of a swirl.

This year, LACERA’s investment staff plans to ramp up the portfolio’s exposure to venture capital, growth equity, small buyouts and international funds, according to a copy of the retirement system’s annual investment plan.

The transition marks a significant change from the commitment strategy LACERA followed over the last five years, when roughly two-thirds of its commitments went to buyout funds. The retirement system directed almost 90 percent of its commitments to U.S. managers during the same period, according to the retirement plan.

While Los Angeles County will continue to maintain relationships with quality buyout managers returning to market with new funds, staff plans to emphasize top-tier managers in specialized, international or down-market strategies this year. Allocations to funds that invest in niche strategies would diversify its $4.3 billion private equity portfolio, which is 70 percent exposed to large and middle-market buyouts.

The investment plan also calls for some commitments to new managers, according to retirement system documents.

LACERA aggressively pursued its 2015 allocation strategy during the first quarter. In March, the retirement system committed $125 million to Institutional Venture Partners, a late-stage venture capital fund that is expected to hold a first and final close in mid-to-late April. Earlier this year, the retirement association allocated up to $350 million combined across venture capital and small-market buyout funds managed by The Carlyle Group, Juggernaut Capital Partners and Storm Ventures.

Those early allocations put the retirement system on pace to reach the $2 billion commitment pace it set in January, almost double what it committed to the asset class in 2014.

“LACERA has diversified into VC, international and growth over the years and has enjoyed good returns from these investments,” LACERA said in a statement responding to questions from Buyouts. “Our goal is to remain solidly within the allocation target ranges for buyout, venture capital, and special situations established by LACERA’s Board of Investments.”

Technically speaking, Los Angeles County’s portfolio already meets the allocation ranges set for those three sub-sectors, as well its target range for international exposure, according to retirement system documents. The effort to diversify its portfolio largely applies to smaller strategies that fall within its allocation for buyout, venture capital or special-situations funds, including certain energy vehicles.

In the beginning

LACERA launched its private equity program in 1986 and was an active LP through the late 1980s and early 1990s. The pension amassed a portfolio of more than 50 funds after its first decade of investing in the asset class, including stakes in early buyout funds raised by Blackstone Group, Warburg Pincus and Welsh Carson Anderson & Stowe, among others. The pension also committed heavily to venture capital funds, such as Kleiner Perkins Caulfield & Byers and Summit Ventures.

As LACERA’s investment portfolio grew, so did the size and pace of its commitments. In 2012 and 2013, a dozen of its 17 fund commitments were for $100 million or more. Its average commitment size exceeded $120 million last year. (Because many of the 2014 funds were oversubscribed, LACERA’s average allocation to each of those managers ended up being about $88 million.)

Small buyouts account for just 7 percent of of Los Angeles County’s buyout allocation, which is “well below the exposures of both mid- and large-buyouts,” according to the investment plan. While staff considers the buyouts portfolio sound in its current form, boosting exposure to small buyouts will allow the pension to access a market that offers wider “breadth and depth of opportunities.”

The pension appears to be seeking more breadth and depth in its international private equity portfolio, too. While Los Angeles County’s international exposure sits at roughly 30 percent – near the middle of its target range of 20 percent to 45 percent – more than half of that non-U.S. exposure is to other developed markets, particularly funds with U.K. or Western European strategies.

The investment plan notes that the International Monetary Fund has forecast an overall decline in developed market GDPs, which have been bogged down by high debt burdens. Meanwhile, governments in developing market economies offer stronger balance sheets, which have propelled GDP growth projections in certain economies, particularly in emerging Asia, to as much 6 percent or more. As such, LACERA plans to direct its future international commitments to funds focusing on Southeast Asia, Latin America and Africa, as well as developed Asia.

The retirement system boosted its exposure to developed Asia last year when it allocated $50 million to GGV Capital, a venture capital firm that invests in companies in China and the United States.

“Private equity in developed Asia (China, Japan, South Korea, Taiwan, Australia) presents an attractive market opportunity given the strong economic growth in the region, improved financial markets, and greater regulatory transparency,” the investment plan states.

Active in secondaries

Asia could mark an important area of interest for the retirement system as it looks to acquire fund stakes on the secondary market, according to the investment plan.

“At this point, LACERA is a motivated buyer, as this would allow the program to opportunistically increase exposure to high conviction managers at attractive pricing,” the investment plan states. The plan also notes that rich pricing in the secondary market may mute returns.

When contacted by Buyouts, LACERA downplayed the notion that any fund strategy or geography could emerge as a particular focus as the pension tracks opportunities on the secondary market. However, the investment plan states that staff plans to review secondary opportunities in Asia as “investors have generally received less liquidity than anticipated over the past decade and have begun looking for options to streamline their portfolios.”

When asked if there are any funds, strategies or geographies it plans to focus on as it acquires fund stakes via the secondary market, LACERA told Buyouts that “there are no geographic focuses on secondaries. Like most investors, LACERA looks at secondaries on an opportunistic basis.”