LACERA mulls GP stakes opportunity

Versus investing as an LP in PE funds, LACERA could benefit from regular and stable cashflows and the growth of GPs if it gets into the GP stakes market, according to a staff review in July.

Los Angeles County Employees’ Retirement Association is evaluating ways in which it can join the GP stakes market.

Staff at the California pension presented an overview of the GP stakes landscape to its board of directors in a virtual board meeting in early July, following a two-month evaluation determining its feasibility and suitability.

According to the review, the main benefits to investors include regular cashflows from the underlying business, low correlation to equities, more transparency and visibility to the GP business and diversification across a GP’s multiple funds, strategies and vintages.

On the return composition, the review found that by participating in the GP stakes market LACERA could expect a net internal rate of return of between 12 percent to 16 percent, annual yield expectations of more than 5 percent and a potential 0.5x+ return on exit.

The review also noted that LACERA could get exposure to GP stakes investments by making direct GP stakes investments as well as investing in GP stakes funds to benefit from co-investment opportunities. Several unnamed GPs have already approached LACERA on the former, according to the documents.

Concerns around the strategy were also outlined during the board meeting including conflicts of interest, due diligence and legal complexity as well as fewer exit options.

On conflicts, LACERA noted that “as LPs, they would want GPs to limit fund size, focus on niche strategies and lower fees”. However, “as GP investors, we want GPs to grow fund sizes, expand into new strategies and increase fee revenue”.

LACERA has $57.8 billion in assets as of May 2020, of which 11 percent or $6.3 billion is in private equity. It has backed funds managed by Silver Lake, Summit Partners and CVC Capital Partners, according to PEI data.

The GPs stakes market has grown from handful of large investors in the space including Dyal Capital Partners and Blackstone’s Strategic Capital unit to include more niche players such as Capital Constellation and Goodhart Partners that are targeting emerging managers and mid-market firms. Among recent GP stakes activity include Blackstone’s deal with BC Partners for $500 million and Petershill’s purchase of Permira Advisers.

Private equity investors seeking to acquire minority stakes in mid-sized GPs are looking at an approximately $90 billion market opportunity, according to a report from Investcorp.