Exclusive: Los Angeles Water and Power CIO Explains Strategy Behind Its ‘Young’ Private Equity Portfolio

Pension gears up $400 million pacing plan for the 12-year-old allocation.

Jeremy Wolfson

After setting up a $400 million private equity pacing plan for the year, the Los Angeles Water and Power Retirement Plan’s Chief Investment Officer Jeremy Wolfson discussed the pension’s strategy for its relatively new private equity program.

“It’s still a young portfolio experiencing some j-curve,” Wolfson told CIO of the 12-year-old allocation, “however, having the dry powder to deploy during various economic and market environments, instead of simply having to recycle distributions, has enabled us to perform very well over the years.”

The new pacing plan calls for $400 million across four to seven partnerships, with each commitment valued between $50 million and $125 million throughout the year. “We take calculated but slightly more concentrated risk by typically investing in larger bite sizes with less funds and GPs,” Wolfson added.

“This overall portfolio construction thesis has resulted in generating more alpha instead of having a large number of smaller investments that could result in simply receiving private equity beta exposure, which could limit our ability to move the needle in any material way.”

The retirement fund’s total fiduciary net position for the retirement fund measured at $12.3 billion as of its latest annual report dated June 30, 2018. The private equity program generated one-, three-, and five-year returns of 12.67%, 9.77%, and 11.22%, respectively, at that time. Its private equity pacing plan to maintain the allocation as close as possible to the 8% target is illustrated below:

“Our focus late cycle is to continue to deploy capital with high conviction GPs that have proven their ability to create value over multiple cycles with less or limited leverage in the middle market and small-cap buyout space,” Wolfson said. “We also look for co-invest opportunities with the right partners to enhance overall deal economics.”

In 2018, commitment activity for the portfolio was “within target,” according to a report from the pension. It committed $63 million to Crestview Partners IV, $85 million to Harvest Partners VIII, $22.5 million to Industry Ventures Special Opportunities Fund III, and $75 million apiece to Lexington Capital Partners IX and Vista Equity Partners Fund VII.

“Although we invest globally, we’re still fairly US-centric. We still believe in US fundamentals but are sensitive to late-cycle investment strategies that are slightly more defensive and idiosyncratic. We will also continue to look for non-US opportunities as we look to diversify our exposures.”

Private equity is gearing up to be a relatively more robust sector than it is today, with pensions such as the California Public Employees’ Retirement System (CalPERS) creating proprietary platforms to invest in the asset class.

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