Despite higher fees, LACERA picks JP Morgan for emerging-manager program

Los Angeles County Employees’ Retirement Association re-upped $300 million to a private equity separate account with JP Morgan Private Equity Group, passing up lower-cost bids offered by other firms offering similar strategies.

The new separate account will expand Los Angeles County’s $54.6 billion public pension’s PE emerging-manager program, which JP Morgan has overseen since 2008. The program, totaling $350 million of commitments, has netted a 24.3 percent internal rate of return and 1.8x multiple on invested capital since inception — results that proved critical to JPMorgan obtaining the mandate.

“While the firm did not score as highly through this search process as in the 2008 process, JPMorgan has performed well,” a memo prepared by LACERA staff says. As managed by JPMorgan, the emerging-manager program “achieved all objectives presented by LACERA.”

JPMorgan’s bid to continue managing LACERA’s PE emerging-manager portfolio was selected over those submitted by fellow finalists Adams Street Partners and Morgan Stanley, which notched superior scores in LACERA’s assessment. Both firms were considered strong performers by LACERA staff, which ranked Adams Street’s investment team and track record highest among the finalists.

Furthermore, Adams Street and Morgan Stanley’s bids included lower fees and a smaller share of carried interest than what JP Morgan offered, according to the report. The retirement association projected a 15-year, $300 million account with Adams Street would have cost $21.7 million, while Morgan Stanley would have cost $36.4 million. The cost projection for a re-up with JP Morgan came in at $42 million, the most expensive bid among the finalists.

“After a thorough and deliberate evaluation of all relevant materials, the Board of Investments made a decision in its independent judgment by a unanimous vote of the members present to continue its relationship with JP Morgan as the manager of this program,” according to a statement provided by LACERA.

In its final report, retirement association staff noted the existence of a personal relationship between LACERA CIO Jonathan Grabel and Jarrod Fong, a managing director on JP Morgan’s private equity investment team. Grabel, who joined LACERA from Public Employees Retirement Association of New Mexico last year, did not participate in the initial scoring of the RFP’s applicants.

“Mr. Grabel did not have a vote on the final award and his disclosure of his friendship with JP Morgan managing director Jarrod Fong was a best practice and played no bearing on the final award. LACERA and JP Morgan began this program prior to the time at which Mr. Grabel joined LACERA,” according to the statement.

JPMorgan declined comment. Grabel and LACERA’s private equity chief, Christopher Wagner, were unavailable for comment.

“LACERA is an important relationship for [J.P. Morgan],” the firm wrote in a presentation to the pension made available through an open-records request. “We are proud of the performance. … EM [the emerging manager strategy] is central to our overall business.”

Public pensions maintain different definitions of what constitutes an emerging manager, depending on the institution. Los Angeles County considers any private equity firm raising its first, second or third institutional fund with targets of $750 million or less to be “emerging.” Venture capital funds are capped $300 million.

LACERA’s private equity program includes more than 300 investments managed by 150 managers, according to an internal investment report. The $5.1 billion portfolio has delivered a 16.1 percent IRR since its inception in 1986.

Action Item: For more on LACERA, visit www.lacera.com

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