San Bernardino pension starts to see pain in VC, growth portfolios

LPs and GPs have been bracing for private markets to reflect the turmoil in the public markets.

San Bernadino County Employees’ Retirement Association’s venture capital and growth equity funds dropped in value by 10 percent this year, according to remarks made at its latest investment committee meeting.

San Bernardino senior investment officer Amit Thanki’s comments were among the first to provide analysis on the direction of private market valuations, which many in the industry anticipate will fall for the second quarter.

“We might be at the beginning of a correction, if you want to call it that, in private markets. We have not seen that quite yet. But we are learning from our managers that there is a big change happening,” Thanki said at San Bernardino’s investment committee meeting held on July 14.

Thanki said one reason venture capital and growth equity holdings fell in value is that many contain a component of public equity.

Buyout and private debt funds continue to generate positive returns and are up 1.5 percent since the start of the year, Thanki said.

Still, funds with a 2020 and 2021 vintage year were purchased at the height of the market and may face several challenges, according to Thanki.

“Given where we sit today, where interest rates are moving and a possible recession, we think those are going to be tough years,” Thanki said.

According to Thanki, fundamentals of underlying companies continue to show strength, but many managers were starting to price in a predicted recession when determining valuations.

“LP appetite in private equity is weakening compared to what we’ve heard in the past,” Thanki said, adding that a primary reason was the denominator effect, which occurs when private equity allocations increase as a percentage of the full fund when public stock holdings fall in value.

San Bernardino allocates 19.3 percent of its total assets to private equity, above its target allocation of 18 percent. The $14 billion retirement system allows a range between 16 percent and 23 percent for its private equity allocation, Thanki said.

San Bernardino has a “somewhat mature” private equity portfolio that generates significant cashflow, according to Thanki.

Thanki’s remarks came during a discussion about the system’s private equity placing plan.

According to Thanki, San Bernardino has $162 million left to allocate to a manager this year after starting with a $700 million total PE budget.

Thanki said San Bernardino’s investment staff has become more selective in its process when evaluating potential managers.

“We’re making sure GPs are the best quality we can find and have a track record of navigating rocky markets and showing discipline. Discipline pays for itself over time whereas exuberance can cause pain,” Thanki said.

“If you’re buying a company valued at 20 times more than EBITDA, you’re perhaps barking up the wrong tree at the wrong time. If you purchase something not supported by the market, you will be hurting,” Thanki said.