San Diego County hesitates to commit while GPs have upper hand

  • $13 bln fund is below 23 pct private-market target
  • Staff surveyed PE firms in meetings, calls, conferences
  • Tries to negotiate better alignment with select firms

The $13 billion San Diego County Employees’ Retirement Association doesn’t want to commit to PE funds when GPs seem to have all the negotiating leverage, and it is instead taking its time to pursue partnerships with better fee alignment. 

SDCERA has a 20.9 percent current allocation to private markets, below its 23 percent target. But CIO Stephen Sexauer said at a recent board meeting that hes not in a hurry to meet that allocation goal.

“Theres so much cash trying to get in, [general partners] get to set all the terms, and theyre clearly in their favor and not in ours,” Sexauer told the board at the Sept. 20 meeting.

“We have not been putting money into private equity. What we have been doing in private equity is weve been carefully looking at good, long-term partners, and trying to find really good firms with really good people and then get alignment with them.”

SDCERAs investment staff met with several firms in July, held conference calls with others, and attended the Pension Bridge Private Equity conference in Chicago.

Throughout its recent discussions with industry professionals, staff came away with the impression that limited partners dont have much leverage when making PE commitments, according to a memo prepared for the board.

Valuations are at peak levels, cash flows into the asset classes are at all-time highs, and the dry powder waiting to be invested is two times greater than the levels in 2016, according to the memo.

Investment firms told SDCERA that “it’s a great time to raise funds,” and “it’s a wrestling match, and the GPs have all the upper hand — and they use it to dictate the deal terms.”

“The four words that were focused on are we win, they win,” Sexauer told the board.

“And unfortunately, the industry, because theres so much money piling in, works the other way: they win, and maybe we win. So thats the reason weve been going slow on that.”

Action Item: Check out SDCERA’s latest risk-return report here: