Strong returns from co-investments and secondaries have LACERA itching for more

Co-investments and secondaries have performed so well that Los Angeles County Employees Retirement Association is looking into bolstering its efforts in both areas.

At a recent LACERA committee meeting, investment staff recommended higher commitment limits for co-investments and secondaries as well as broader investment parameters for both asset classes.

Currently, staff is allowed to invest up to $40 million per co-investment, which they would like to increase to $70 million. Per year, staff can deploy up to $150 million in co-investments and up to $200 million in secondaries, for a total of $350 million. Staff would like to raise that to $450 million per year, spread across both investment categories.

Staff would also like to make slight changes to co-investment criteria to include “high-growth pre-EBITDA” companies with an expected liquidity event within the next two years, and to allow LACERA to make global co-investments.

On the secondaries front, staff wants to widen the parameters of possible secondaries purchases by removing requirements that an investment’s primary fund must be at least 70 percent deployed and must have been managed by the current team for at least three years.

These policies would be an advancement from what the board approved last year, which Buyouts reported. The November 5 presentation also said staff wanted to use co-investments and secondaries to “better manage vintage-year exposure” and to generally lower the costs related to the private equity program.

The recommended changes aren’t surprising given how well co-investments and secondaries have performed for LACERA.

In-house co-investments and secondaries outperformed the primary portfolio by 2,100 basis points, coming in at about 29 percent since the third quarter of 2019. That placed the program in the first quartile versus 2019 vintage-year private equity funds, according to the presentation.

Co-investments returned 35.3 percent and secondaries 22.8 percent. The programs also saved $3.1 million in fees. Co-investments have no management fees or carry and secondaries funds generally charge lower fees.

As of September, LACERA’s PE portfolio was valued at $6.9 billion and took up 11.5 percent of the total fund, which was valued at $59.8 billion as of July. The portfolio is split into three sections: About 62 percent is in buyouts, valued at $4.2 billion with almost $8 billion in total exposure; about 19 percent is in venture capital and growth equity, valued at $1.3 billion with just over $2 billion in total exposure; and about 20 percent is in co-investments/funds-of-funds/secondaries, valued at $1.35 billion with $1.89 billion in total exposure.

All are within their current ranges, which staff wants to keep. For buyouts, the range is 50 to 85 percent. For venture capital and growth equity, it is 15 to 30 percent. For co-investments, funds-of-funds and secondaries, the range is 10 to 25 percent.

Staff also wants to maintain the current yearly commitment pace for all private equity at $1.6 billion, but will revisit that after an asset allocation exercise planned for 2021.

As of September 30, LACERA’s private equity portfolio returned 7.99 percent over one year. As of June 30, it was returning 13.7 percent over three years, 12.7 percent over five years and 15.4 percent over 10 years.

The changes were approved by the pension’s Equity: Public/Private Committee and will come before the full board in December.

Action Item: Read the materials from the LACERA November 5 Equity: Public/Private Committee here.