LACERS bets on secondary market

The $10.8bn system recently committed to Coller Capital as a way to ‘diversify existing private equity portfolios, obtain exposure to previously restricted funds and participate directly in select investments’.

As the secondary market for private equity interests matures and expands, the Los Angeles City Employees’ Retirement System has moved to take advantage of the opportunity.

The $10.8 billion retirement system recently committed $25 million to Coller Capital’s sixth fund, which closed recently on $5.5 billion. The secondary market provides investors the opportunity to “diversify existing private equity portfolios, obtain exposure to previously restricted funds and participate directly in select investments”, according to an investment report created by LACERS investment officer Randy Williams. Coller has produced an aggregate net IRR of 16.7 percent as of 31 March, 2012, Williams’ report said.

The secondary market has been on track to at least match its record deal volume total for 2011, which came in around $25 billion, a record. Sellers of secondary interests include public pension systems trying to rebalance aging or unwieldy portfolios, along with financial institutions needing to come into compliance with regulations restricting their ability to house private equity operations.

However, some market professionals anticipate a slow-down in secondary transactions as business winds down in the summer months, and also as economic uncertainty continues to emanate from the eurozone, causing volatility in the primary markets to ripple in secondary markets.

Coller’s large fund is just one of several that are in the market searching for deals: Lexington Partners raised what had been the largest-ever secondaries fund last year with $7 billion, only to be topped by AXA Private Equity, which closed its fifth secondaries fund on $7.1 billion, along with a $900 million fund of funds sidecar.

While LACERS’ Coller commitment tapped into opportunities in the secondary market, the system also sought more primary exposure through a $30 million commitment to Advent International’s seventh fund. Advent's fund, which is targeting around $8 billion, has been making the rounds of US public pension systems in recent months. The firm also received commitments from the Tennessee Consolidated Retirement System, the Ohio Police & Fire Pension Fund and the Washington State Investment Board, which allocated $400 million to the fund.

Advent has distributed more than $9 billion across five funds, generating a net internal rate of return of 22.7 percent as of 31 December, 2011, according to LACERS documents. “Returns have been particularly attractive in Funds IV and V on a realised basis as they are the top-ranked of all global buyout funds within their respective vintage years,” according to a separate LACERS investment report prepared by Williams.

At the beginning of the year, LACERS bumped its allocation to private equity to 12 percent and lumped the asset class into a general “equities” category, expected to account for 65 percent of the $10.8 billion fund. The system previously had a 9 percent allocation target to alternative investments, described as private equity, venture capital, buyout, mezzanine financing, distressed securities, natural resources and hedge funds.