LACERS board member calls out ‘underperforming’ private equity

Sung Won Sohn made his comments during a discussion about potentially upping the $21.4bn pension's PE allocation.

A Los Angeles City Employees’ Retirement System board member expressed dissatisfaction with the $21.4 billion pension system’s private equity programme last week, signalling his opposition to hiking the allocation.

“I know in the long term private equity is supposed to give us very healthy returns, but that of course has not been the case for quite some time,” said Sung Won Sohn at Tuesday’s board meeting. “It’s been anything but healthy returns.”

Sohn’s comments came during the board’s second discussion on possible changes to the pension system’s asset allocations. One of the potential mixes included raising the private equity allocation from 14 percent to 16 percent. Several other board members appeared to support it, as did general consultant NEPC. Sohn, an eminent economist and retired banker, preferred a different one that did not include the private equity hike.

“I view that as an underperforming asset that will continue to underperform,” he said.

Sohn pointed to the most recent performance report, presented to the board that day. It showed the pension’s $2.45 billion PE portfolio returning 13.71 percent over one year, 12.64 percent over three years, 11.81 percent over five years and 12.44 percent over 10 years, net of fees. The numbers were as of 31 December 2020, lagged a quarter.

These returns all trailed the benchmark, which came in at 24.47 percent over one year, 17.89 percent over three years, 18.86 percent over five years and 17.42 percent over 10 years.

LACERS’s current benchmark is the Russell 3000 public markets index plus 300 basis points. LACERS and other LPs, most notably Massachusetts Pension Reserves Investment Management Board, have expressed frustration with this benchmark’s ability to effectively measure actual private equity performance during volatile periods.

LACERS’s investment committee recently approved changing that benchmark to one tied to the private markets, as affiliate publication Buyouts reported. Sohn, who is the chairman of that committee, was not present at that meeting.

LACERS did not respond to a request to make him available for comment, and other attempts to reach him went unanswered. LACERS did confirm the benchmark change has not yet been approved by the full board.

On Tuesday, the board did not make a decision on a new asset allocation, asking staff for more information at a future meeting.

“Maybe the staff can tell us why we should be adding to private equity when it’s been performing so poorly relative to other assets,” Sohn said.

LACERS chief investment officer Rod June declined to comment.

This is not the first time Sohn has commented critically on private equity. Last year during an investment committee meeting he expressed scepticism about private equity-owned companies’ ability to weather the covid market disruption.

LACERS’s private equity consultant, Aksia TorreyCove, has said the pension’s portfolio has too many manager relationships and could stand to unload some assets in the secondaries market, as Buyouts reported.

However, following the covid-19 disruption, it has recommended the pension focus on secondaries fund commitments, while keeping an eye out for a potential sale.

This article first appeared in affiliate publication Buyouts