LACERS plots 2021 private equity course

Some board members have voiced concerns about the pace at which the $20bn pension is implementing plans to branch out into secondaries and co-investments.

Los Angeles City Employees’ Retirement System plans to gradually increase its private equity commitment pace over the next few years as it seeks to get its allocation up to target while diversifying its strategies in the asset class.

The system is plotting its private equity course even as some board members are expressing frustration with the pace at which change is occurring.

According to a strategic plan created by staff and consultant Aksia TorreyCove, the pension was to commit at least $675 million and up to $750 million to PE in 2021, an increase from this year’s $650 million target. As of October, it had committed $530 million to private equity in 2020.

As of June 30, the pension was valued at $17.7 billion. Its private equity portfolio took up 12.6 percent of its assets against a target of 14 percent. As of November 24, the pension’s value had increased to $20.27 billion.

The plan called for “incremental increases in annual commitments” to get the portfolio up to its target weight. In the meantime, LACERS will aim to commit to between 14 and 18 firms with a target size of $50 million to $70 million per commitment or manager relationship. That includes plans for three to five commitments of up to $20 million to emerging managers.

LACERS also plans to make progress on a long-gestating plan to break into secondaries and co-investments.

For secondaries, Aksia TorreyCove recently recommended a change in strategies based on the disruption of the coronavirus crisis.

Earlier this year, the consultant recommended LACERS look into a secondaries sale to unload some of its older assets, as Buyouts reported. The pension’s portfolio has about 200 managers, said Aksia TorreyCove’s David Fann at a November 10 investment committee meeting.

“One of the consequences of having a large portfolio is you end up having a median performer,” Fann said November 10. “You essentially have bought the market without emphasizing perhaps the best relationships.”

He recommended 50 to 100 managers as a more manageable number.

Now, the consultant is advising commitments to secondaries funds in lieu of a sale, due to the dynamics of the covid disruption, as Buyouts reported, but will keep an eye out for an eventual secondaries sale.

LACERS will also continue its plan to invest in third-party co-investment managers, with an eye toward building out an internal co-investment capacity in the future, according to the strategic plan.

But some board members expressed frustration with LACERS’ lack of action on the secondaries and co-investment market this year. The topic came up again at the November 10 meeting.

“I’m…a little bit disappointed that the framework hasn’t been established,” said board member Elizabeth Lee at the pension’s November 10 investment committee meeting. She repeated her earlier concerns that LACERS had “missed the boat” on the secondaries market during the covid crisis, which Buyouts has previously reported.

Chief investment officer Rodney June agreed that LACERS had likely missed some opportunities, but said staff wanted to be sure it had the policy right and had thoroughly educated the board.

“I apologize for the delay on this, but when it comes to these types of programs where it’s higher risk and potentially higher returns, we want to ensure that we get the policy down right, because all of the activity from the program will emanate from that policy,” June said. “Until we have the clarity of what those responsibilities are and how much risk the board is willing to take, it’s hard to do anything.”

June said the policies for both secondaries and co-investments will have to involve a clear “delineation of responsibilities.” He also said secondaries opportunities “come and go,” and other opportunities would present themselves in the future.

Both of the other investment committee members, chairman Sung Won Sohn and board member Nilza Serrano, agreed LACERS took too long to make policy adjustments.

Serrano also stressed the importance of allowing the board the chance to weigh in, especially on emerging managers, where she feels the committee needs to be able to ensure that diverse emerging managers get their proper opportunities.

June said the new policy would be put forward to the committee in January. He did not respond to a request for comment for this story.

The 2021 strategic plan was approved by the full LACERS board at its November 24 meeting.

Action Item: read the 2021 LACERS strategic plan here and listen to the November 10 investment committee here.