LACERA considers building in-house team for co-investing

Los Angeles Country Employees’ Retirement Association is evaluating a plan to more aggressively pursue co-investments, using in-house resources to replicate a current $550 million separately managed account with Morgan Stanley.

LACERA, which manages $55.9 billion in assets, believes it has the internal capabilities to execute co‐investments, which will help the system save on fees.

Staff estimates in-sourcing will save $350 million over 15 years, in addition to providing intangible benefits like strengthening its investment culture and image.

LACERA’s investment team presented initial findings to the board’s equity committee Nov. 8 after months evaluating its co-investment program, meeting materials show. Staff will present a revised co-investment strategy based on committee feedback at a later meeting.

A robust internal co-investment program would give LACERA more direct control of its portfolio, its review shows.

LACERA already has co-investment authority in real estate for U.S. properties and commitments of up to $50 million when sourced by an existing LACERA manager.

Its initial draft strategy for private equity co-investments is similarly constricted: All initial co-investments would be buyouts or growth investments in U.S. companies made by approved managers. The system wouldn’t consider venture capital co-investments.

Initially, LACERA would target a $100 million annual commitment pace, seeking four to six co-investments with a maximum size of $40 million and an average size of $25 million.

The co-investment program would kick off with an investment employee and a legal staffer in 2019, with an additional investment employee joining in 2020. LACERA envisions eventually growing the co-investment program to include five investment staffers, two in legal and one accounting employee in 2028.

An in-house co‐investment program is not without risk, but LACERA believes it can mitigate those risks while taking advantage of more advantageous fee structures.

For example, LACERA will have to prepare for challenges in sourcing deals and performing due diligence, but it believes it can leverage its GP roster to produce deal flow and secure preferred access to co‐investments.

LACERA’s commitments represent an average of 8 percent of its managers’ recent funds, and it serves on the advisory board of 70 percent of its core managers’ latest funds.

LACERA has a $5.5 billion PE portfolio, just shy of its 10 percent target allocation.

The portfolio includes three active separate account programs: Morgan Stanley’s $550 million co-investment program, a $600 million middle-market program run by Pathway Capital Management and a $350 million emerging-managers program run by JP Morgan.

Action Item: Read the materials from LACERA’s recent equity committee meeting here: https://bit.ly/2BbWPzb