With new consultant in place, LACERS aims to reshape PE portfolio

Los Angeles City Employees Retirement System approved a 2019 strategic plan recommended by its new consultant, aiming to significantly speed up pacing, rethink limits on commitment sizes and consider secondary sales as it reshapes its portfolio.  

The $17 billion retirement system over the summer hired TorreyCove Capital Partners as its PE consultant, after selecting NEPC as its general investment consultant the previous year.

The board approved an asset allocation NEPC recommended in April, and an action plan on the new allocation in August. The new allocation makes several changes to LACERS’s portfolio, including lifting the PE target to 14 percent from 12 percent.

Sharp pacing increase

To get to 14 percent from its current 10, LACERS would have to significantly increase its pacing over the next five years and rethink its policy limits on commitment sizes, TorreyCove said.

The strategic plan calls for LACERS to commit an additional $100 million to $150 million in 2018, after $335 million already committed this year, and target $550 million to $575 million in commitments for 2019.

After that, TorreyCove recommends annual increases of $75 million to $100 million. That’s a big increase over recent years — LACERS committed about $370 million a year in 2016 and 2017, and an average of $285 million a year from 2013 to 2015.

Jeffrey Goldberger, senior vice president at TorreyCove, said at the October investment-committee meeting that his firm was working to find investments for the end of 2018, though hitting the target wasn’t absolutely necessary.

“We’ve identified one or two potential investments that could fill those holes, but we haven’t identified enough investments yet to fill the full $100 million,” Goldberger said.

“It’s not something that we’re going to absolutely force and just invest in funds because we want to hit that target. We will wait to make sure that we’re finding compelling and interesting investments for the plan.”

To fully implement the strategic plan, LACERS will have to change its investment policy, which caps commitment sizes and doesn’t include a process for secondary sales.

TorreyCove urged LACERS to make 10 to 12 commitments of $50 million to $100 million a year. But the retirement system’s current policy limits it to allocating $25 million to new partnerships and $40 million for re-ups with existing managers.

LACERS CIO Rod June has proposed lifting those limits to $50 million for new partnerships and $100 million for existing managers, as well as raising the maximum fund size for emerging managers to $1 billion.

The commitment limits have contributed to a portfolio that has too many non-core managers, according to TorreyCove’s David Fann, who has recommended that LACERS undergo a “spring cleaning” of its portfolio through secondary sales.

LACERS has 254 partnerships, and 123 specific fund managers in its PE portfolio, which Fann and June say is probably too many.

“I think there’s an argument to be made that there’s probably too much diversification in this portfolio at this point,” Fann said.

The exact mechanics of a secondary sale will be determined later, since LACERS hasn’t done it before and hasn’t written out policies for how to proceed.

Fann said a secondary sale is still a ways off and board members — some of whom expressed hesitation at the idea — would be kept up to date as plans develop.

But demand on the secondary market is high, he added, and a secondary sale could both rationalize the number of managers in LACERS’s portfolio and monetize legacy investments.

“The good news about the secondary market right now is that there is a bigger supply of capital than there is opportunity, so pricing is very favorable,” Fann said.

“We would imagine Rod’s phone to be ringing off the hook with every secondary buyer in the marketplace asking for details about what he’s selling and when.”

In terms of strategy and focus, the strategic plan calls for LACERS to increase its exposure to buyouts, currently at 54.9 percent of the portfolio, and cut its exposure to growth equity and venture capital, currently at a combined 21.9 percent.

LACERS also plans to selectively add international exposure, particularly in Europe, Asia and deeper developed markets.

TorreyCove and LACERS staff also plan to explore adding a peer benchmark to complement the current benchmark of the Russell 3000 +300 basis points.

Action Item: Read the LACERS 2019 strategic plan for PE here https://bit.ly/2JFFSjn