LACERA plans to expand emerging market exposure

PEI spoke with David Simpson, an investment officer for private equity at LACERA, about the LP’s plans to diversify commitments to private equity in new regions, which could include Africa, Southeast Asia and Eastern Europe.

LACERA plans to expand emerging market exposure

PEI spoke with David Simpson, an investment officer for private equity at LACERA, about the LP's plans to diversify commitments to private equity in new regions, which could include Africa, Southeast Asia and Eastern Europe.

The Los Angeles County Employee's Retirement Association (LACERA) plans to establish three to five new relationships with regional or pan-regional fund managers targeting the emerging markets and to explore the possibility to launch a separate account managed by a pan-emerging markets fund of funds, according to David Simpson, investment manager for private equity at LACERA.

As of April 2016, LACERA, a $47 billion pension plan, had $4.4 billion, or 9.3 percent, in private equity exposure, slightly below its 10 percent policy target level. Of that $4.4 billion, its emerging market exposure stands at 4.3 percent, or $188 million. 

In August 2013, LACERA committed $100 million to MBK Partners III, which invests in South Korea, Japan, China, and Taiwan. And in August 2015, LACERA made its first primary commitment to Latin America, serving as an anchor investor and committing $125 million to Australis Partners . Australis targets the Pacific Alliance countries of Colombia, Mexico, Chile and Peru. Potential additional relationships are envisioned in Africa, Southeast Asia and potentially Eastern Europe. 

The regional funds tend to be managed by long-established teams and are larger in size enabling them to absorb $100 million to $150 million commitments, Simpson said.  They offer risk mitigation through diversification of country, currency and sector, which LACERA believes enables them to attain attractive returns while not being totally exposed to the volatility that might befall an overly concentrated portfolio.   

Later this year, LACERA will also explore using a fund-of-funds manager to obtain exposure to smaller emerging market managers who may be pursuing more focused strategies. LACERA would leverage the resources of that intermediary to gain introductions to the next generation of institutional managers that have the potential to graduate to their core primary program. 

Simpson added that it's especially critical in emerging markets because companies are growing and the ability to execute in terms of not just having a game plan to expand the company, but having the proven ability to guide the company towards successfully implementing its strategic plan is important.

Qualities that LACERA seeks in all managers include long-standing, stable, diversely-skilled management teams; serial top-quartile performance; a differentiated and sustainable strategy; and proven ability to source companies, grow companies and attain attractive exits. Perhaps the only difference in emerging markets is a desire for investment professionals to have deep local knowledge and networks combined with best global investment practices obtained at elite universities and top investment firms, Simpson said.