private equity allocation

LACERA Raises Private Equity Target, But Fulfilling It Will Be Challenge

The Los Angeles County Employees Retirement Association in 2014 increased the amount of money it plans to invest in private equity this year, from $1.8 billion to $2 billion.

Over the next few years, the fund plans to bring its target PE allocation up to 11 percent of its portfolio, up from 8.7 percent in 2014.

But raising the target allocation is easy. Fulfilling it will be more challenging, as many pension funds, including LACERA, found out in 2014.

From the Wall Street Journal:

[LACERA] fell short of its private equity pacing target in a year when a record number of funds reached their hard caps and investors were forced to scale back commitments or were turned away at the door.

“Certain realities exist in the current private equity environment that challenge staff’s ability to effectively deploy $1.8 billion to $2.0 billion of capital annually,” a memo penned this month from investment staff to trustees and reviewed by Dow Jones stated.

That’s how much Lacera projects is needed in private equity commitments each year for it to grow its private equity allocation to a targeted 11% of its portfolio mix in the next four to five years. The pension system had 8.7% of its portfolio in private equity holdings as of Sept. 30. The pension fund has in the past stressed that it does not want to “dilute the quality of general partner relationships nor the thoroughness of the due diligence process just to hit the target.”

Lacera’s combined commitments in 2014 fell short of its projected pacing figure, but reflects the pension fund’s goal “to not dilute the quality of general partner relationships nor the thoroughness of the due diligence process just to hit the target.”

LACERA manages $47 billion in assets.

Photo jjMustang_79 via Flickr CC License

Report: Institutional Investors Plan to Increase Private Equity, Decrease Hedge Fund Allocations in 2015

A Coller Capital report released Monday showed two strong trends in institutional investor sentiment.

Forty percent of investors are planning on increasing their allocations to private equity in 2015. Meanwhile, 33 percent of those same investors said the see themselves decreasing their hedge fund portfolios.

More from Money News:

Ninety-three percent of investors believe they will get annual net returns of more than 11 percent from their private equity portfolios over a three- to five-year horizon, the survey showed, up from 81 percent of investors two years ago.

Last year saw a record $568 billion of distributions from private equity, compared with $381 billion in 2012, according to figures from data compiler Preqin.

“What you’ve seen over the last two years is distributions from the private equity portfolio have been very, very strong, which will give investors a cause for optimism,” said Michael Schad, Partner at Coller Capital.

“Four years ago people might have had questions on the 2006-2007 vintage. But these funds have really turned around,” Schad added, referring to funds raised in the years just before the financial crisis.

That optimism contrasted with the one-third of investors that said they would decrease their allocation to hedge funds, following poor performance from many such firms. Major U.S. pension fund CalPERS made a high-profile withdrawal from hedge funds in September.

Hedge funds on average have gained just under 5 percent this year through November, according to data from industry tracker Eurekahedge, against a 10.2 percent rise in the S&P 500 U.S. equities index.

The full report can be read here.

Photo jjMustang_79 via Flickr CC License

CalPERS May Be Done With Hedge Funds, But It’s Far From Finished With Fees

There’s been a torrent of media coverage about how CalPERS, with its decision to kick hedge funds to the curb, has also distanced itself from high-fee investment managers.

But nearly $500 million of private equity fees say otherwise, writes the New York Times’ Josh Barro:

Here’s the thing: Calpers, America’s largest public employee pension system, with $300 billion in assets under management, isn’t getting away from investment gurus altogether.

The system’s $4 billion hedge fund program is small potatoes; its main exposure to high-fee gurus is through $31 billion in private equity funds, which just like hedge funds rely on the premise that highly paid fund managers can beat the market through special insight and talent.

Calpers paid $476 million in management fees on its private equity portfolio in the fiscal year ending June 2013, equal to 1.4 percent of private equity assets, about 20 times what it would have cost Calpers to invest a similar amount in stocks and bonds. And Calpers’s commitment to private equity remains strong, guru-driven fees and all.

Ted Eliopoulos, the interim chief investment officer at Calpers, the California Public Employees’ Retirement System, made clear in a statement that the choice to exit hedge funds was specific to the asset class. He criticized hedge funds’ “complexity, cost and the lack of ability to scale at Calpers’s size.” The key word there is “scale”: Even at $4 billion, hedge funds made up just over 1 percent of the Calpers portfolio. That wasn’t enough to make a meaningful difference to the fund’s returns or diversification, and the system didn’t see good opportunities to scale up.

As of 2013, CalPERS invested 10.4 percent of its portfolio in private equity. That’s a big jump from its 6 percent PE allocation in 2006.

But, according to Josh Barro, CalPERS cut its target private equity allocation twice this year—the target allocation at the beginning of 2014 was 14 percent. Now, two downward revisions later, PE’s target allocation sits at 10 percent.

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