Pension System: Los Angeles City Employees’ Retirement System
Private Equity Commitments: Total of $2.5 bln as of Dec. 31, 2012
Total Portfolio Value: $12 bln as of March 31
Core Private Investment Portfolio: 138 Partnerships; 69 managers
Year founded: 1937
Consultant: Hamilton Lane
Number of participants: Provides services to more than 25,000 active city employees and benefits for 17,000 retirees and their beneficiaries
Chief Investment Officer: Rodney June
All told, LACERS aims to grow its private equity allocation from 11 percent at the end of 2012 to 12 percent, according to the pension fund’s 2013 strategic plan approved at its May 28 board meeting. That translates to between $325 million and $350 million in private equity commitments in 2013, up from its average annual pledge rate of $215 million between 2006 and 2012 and more than twice its $134.3 million average commitment over the past 17 years.
Billy Charlton, a partner at limited partner advisory firm Altius Associates, said a 12 percent allocation target to private equity isn’t unusual for a pension fund with prior experience in buyout funds. “Five percent is kind of where they start and then they gravitate up to 10 percent,” he said. “A 12 percent allocation is consistent for a fund that’s done some private equity investing. There are higher allocations — that’s about the middle of the range.”
Last June, LACERS named Rodney June as its chief investment officer, two years after the retirement of Daniel Gallagher. A LACERS spokesperson declined to comment and directed questions to information on the LACERS web site. A spokeswoman for Hamilton Lane, the private equity advisory firm for the California pension fund, declined to comment.
Healthy distributions appear to be behind the boost in commitment pace this year. The total sum of cash distributions increased to more than $300 million in 2012 from just over $200 million in 2011, while committed capital averaged about $200 million over the past two years. As a result LACERS reported positive cash flow of about $100 million in 2012 and roughly $30 million in 2011 from its private equity portfolio.
“After the global financial crisis in 2009, annual contributions have picked up the last three years and remained consistent—driven by growth in LACERS portfolio and robust private equity market,” LACERS said. Hamilton Lane joined LACERS as its adviser in 2005.
Mid-Market On Tap
At it looks toward the balance of 2013, LACERS plans to “seek investment opportunities generating liquidity earlier in the investment life; funds with higher cash yield profiles or shorter holding durations for underlying assets,” the pension fund said in its strategic plan.
The retirement system plans to increase its small-market and mid-market exposure as it sifts for “compelling new managers” in the space, and increases its investment commitments with its “best performers.” At the end of 2012, LACERS recorded a 27 percent exposure to small and mid-cap funds at year-end 2012, below its optimal range of 30 percent to 40 percent.
LACERS also plans to find “attractive emerging managers” raising their first or second institutional fund with product sizes of less than $1 billion. And the pension fund continues to have an appetite for distressed debt and turnaround investing.
In a recent related move, LACERS recently committed up to $25 million to the KPS Special Situations Fund IV LP, a $3 billion distressed buyout limited partnership managed by KPS Capital Partners. LACERS said it has no prior relationship with KPS, founded in 1997 by Eugene Keilin, Michael Psaros and David Shapiro. KPS’s three prior distressed buyout funds earned net IRRs of 13.6 percent, 56.3 percent and 20.6 percent respectively.
In Fund IV, KPS plans to craft a portfolio of 12 to 15 companies in North America and Western Europe with average equity investments of $200 million to $350 million per investment over the next five to six years. Sales to strategic and financial buyers, supplemented with dividend recapitalizations, comprise the fund’s exit strategy.
Tapping into the trend by limited partners to pare down general partners, LACERS also plans to “scale back exposure” to relationships with larger funds and only invests “selectively” with premier names. It said it may take advantage of the secondary market to sell non-core investments.
Overall, LACERS has invested in 138 funds generating an average net IRR of 11.2 percent. Its overall portfolio exposure to buyouts stood at 69 percent at the end of last year, compared to its optimal range of 60 percent to 75 percent.
Mid-sized buyout funds have drawn a total of $424 million in commitments from LACERS and delivered a net internal rate of return of 19 percent as of Dec. 31, 2012. That’s the highest IRR out of four buyout sub-categories and two distressed debt funds broken out by LACERS.
The 19 percent IRR generated by mid-market funds in the LACERS portfolio also beats out results from growth equity and mezzanine debt investments. The only category to better that result is the 47.2 percent net IRR from LACERS’s $25 million commitment to its sole secondary fund, the vintage 2012 Coller International Partners VI LP.
By contrast, LACERS’s commitment of $580 million to large buyout funds earned a 13.4 percent net IRR, while its mega-fund commitment of $437 million earned an 8.4 percent net IRR. Its $203 million commitment to small buyout funds earned a net IRR of 6.8 percent.
Sifting through its private equity portfolio, LACERS’s largest commitment took place in 2010 with its $50 million pledge to Highbridge Principal Strategies Senior Loan Fund II, a special situations vehicle. That investment earned a net IRR of 8.5 percent. (See related chart)
Its 2001 commitment of $6.3 million to Golder, Thoma, Cressey & Rauner Fund VII-A LP, a mid-market buyout fund, earned a net IRR of 83 percent, making the fund its top-performer. By contrast, its 2011 commitment of $25 million to the Hony Capital Fund V LP, a mid-market corporate finance and buyout fund, returned a negative 43.3 percent, making the fund its worst performer although the fund is quite young.