LACERS board member: Small buyouts doing ‘really, really really bad’ compared with larger funds

Commissioner Nilza Serrano asked Aksia TorreyCove for more information about why the $17bn fund's small buyouts program appears to perform worse than medium or large buyouts.

One member of Los Angeles City Employees’ Retirement System‘s board expressed concerns about the performance of its private equity small buyouts portfolio to the $17 billion pension’s private equity consultant last week, and requested further research into the issue.

“It appears that small buyouts are doing really, really really bad compared to medium and large,” commissioner Nilza Serrano said to representatives of Aksia TorreyCove on May 26. “What kind of strategy are you proposing to kind of make that equal to the other two?”

Aksia TorreyCove presented a performance update for LACERS’s $2.1 billion private equity portfolio which broke down the buyouts sub-asset class into three sections: large, medium and small.

As of December 31, 2019, the fund had $1.3 billion committed to large buyouts. Its holdings were valued at $501.5 million. It had an internal rate of return of 14.8 percent and a 1.7x multiple of total value to paid-in capital.

LACERS had $1.6 billion committed to medium buyouts, with a $544.3 million fair market value, a 11.3 percent IRR 1.62x and TVPI multiple.

LACERS had much less committed to small buyouts—only $210.6 million, valued at $75.8 million. That portfolio had a 5.2 percent IRR and a 1.26x TVPI multiple.

In response to Serrano’s question, Jeffrey Goldberger of Aksia TorreyCove said many of the relationships making up those commitments were older ones that had not performed well. He agreed that small buyouts have the potential to outperform large buyouts, but said there were caveats.

“The range of outcomes is much wider for small buyouts than it is for large buyouts,” he said. “Typically [with] large buyout firms, you don’t see them losing money but you also don’t see them returning three times your capital, whereas in small buyouts you will see firms that ultimately will lose money but there will also be firms that are sort of north of three times.”

According to Aksia’s presentation, older small buyouts funds in LACERS’ portfolio with poorer performance records included:

  • Halifax Capital Partners II, with a 2005 vintage and a 7.3 percent net IRR. LACERS committed $10 million to this fund.
  • Enhanced Equity Fund, a 2006 vintage with a 1.1 percent net IRR. LACERS committed $10 million to this fund.
  • Enhanced Equity Fund II, a 2010 vintage with a -21.7 percent net IRR. LACERS also committed $10 million to this fund.

More recently, LACERS committed $10 million to New Water Capital’s debut fund, which had a 2015 vintage and an -8.5 percent net IRR, and $10 million to NMS Fund III, a 2017 vintage with a -4.7 percent net IRR.

These funds were all chosen by previous LACERS private equity consultants. TorreyCove took over as the fund’s private equity consultant in 2018. The firm was acquired by Aksia early this year.

“I think it really comes down to being very selective in your manager selection process at the smaller end of the market, and I think that’s obviously what we’re trying to do is apply a very high bar to those firms just to make sure that the performance is where we expect it,” Goldberger said.

Aksia vice chairman David Fann said one way to avoid poorly-performing small buyouts managers was to make sure the firm’s teams had worked together before.

“You will see that almost all of the funds that we’re committing to are not first time teams,” he said. “We’re emphasizing teams that have either spun out or have done this before as a collective.”

Fann also said it was important for a firm to have “some demonstrated operational skill set” that would suggest they will be able to add value to their portfolio companies.

“I think those are a couple of things that we’re imposing on the portfolio that should enhance further performance of small buyouts,” he said.

At Serrano’s request, Aksia TorreyCove will prepare a deeper presentation on LACERS’ small buyouts holdings to “peel down the onion” on the program.

LACERS chief investment officer Rodney June had no comment for this story. Commissioner Serrano did not respond to a LinkedIn message requesting comment.

Action Item: read the materials from LACERS’ May 26 board meeting .