Annual Report (for 2016) on LACERS Emerging Investment Manager Program

LACERS Emerging Manager Annual Report 2016

Background

LACERS’ Emerging Investment Manager Policy (Policy), adopted on February 14, 2012, and revised on September 24, 2013, identifies guidelines and goals in hiring and retaining Emerging Investment Managers in order to add value to the LACERS investment portfolio. The Policy includes Emerging Investment Manager goal metrics and criteria for investment firms that wish to qualify as an Emerging Investment Manager under the Policy definition. This annual report includes information pursuant to the Policy for the year ending December 31, 2016.

The Policy reporting requirements are as follows:

  1. Names of Emerging Investment Manager firms hired.
  2. Dollar amounts awarded to Emerging Investment Managers.
  3. Report of Emerging Investment Manager Goals Metrics.
  4. List of all investment manager searches.
  5. Staff and consultant efforts to increase the visibility of LACERS investment manager searches and

    representation of Emerging Investment Managers in the LACERS investment portfolio.

  6. PerformancedataforEmergingInvestmentManagers.

Reporting Requirements 1 & 2: Names and Dollar Amounts Awarded to Emerging Investment Managers

Manager

Style

Asset Class

Investment/ Commitment

Bain Double Impact Fund, LP

Buyout

Private Equity

$10 million

Sunstone Partners I, L.P

Buyout

Private Equity

$7.5 million

Asana Partners Fund I

Value Add

Real Estate

$20 million

1

Reporting Requirement 3: Emerging Investment Manager Goal Metrics

Policy metrics are reported along broad asset classes including those that are within the domain of public markets, or those that are within the private markets including private equity and real estate. The policy metric goal for each of the broad asset classes is 10% on an aspirational basis.

For each public market asset class, there are two metrics for measuring Emerging Investment Manager exposure: 1) Asset Class Metric: the total market value of Emerging Investment Managers within a respective asset class divided by the total market value of the respective asset class; and 2) Manager Search Metric: total of all dollars awarded to Emerging Investment Managers in a particular public asset class manager search divided by the total dollars awarded for the respective manager search.

For each private market asset class, there are two metrics for measuring Emerging Investment Manager exposure: 1) Asset Class Metric: the total committed dollars of Emerging Investment Managers within a respective asset class divided by all the dollars within that respective asset class on a market value basis; and 2) Manager Search Metric: the total of all committed capital awarded to Emerging Investment Managers of completed searches within a respective private market asset class divided by all committed capital awarded within the respective private market asset class over a 36-month rolling period ending December 31, 2016.

The following tables provide an overview of Emerging Investment Manager exposure within public markets and private markets, based on the Policy metrics:

Public Markets

Private Markets

Asset Class Metric

Note: There are no emerging investment managers under contract within Fixed Income, Credit Opportunities, or Public Real Assets.

Manager Search Metric
 No public market searches were conducted during calendar year 2016.

Asset Class

Emerging Investment Manager Exposure

U.S. Equity

2.3%

Non-U.S. Equity

2.8%

Asset Class

Asset Class Metric

Manager Search Metric

Private Equity

4.9%

7.9%

Private Real Estate

4.7%

13.8%

On a fund-number basis for the 36-month period ending December 31, 2016, LACERS authorized commitments to a total of eight private equity Emerging Investment Managers out of 53 private equity funds (15%) and two real estate Emerging Investment Managers out of 12 real estate funds (17%).1

1 Four of the 12 real estate funds commitments were additional commitments to existing open-ended core funds pursuant to the Real Estate Investments Fiscal Year 2015-2016 Strategic Plan.

2

Reporting Requirement 4: Searches Conducted in 2016
No public market searches were conducted during the calendar year.

Reporting Requirement 5: Efforts to Increase Visibility and Representation of Emerging Investment Managers

Staff

LACERS actively engages the emerging manager community to help achieve the policy objectives established by the Emerging Investment Manager Policy. During the 2016 calendar year, staff participated in the following emerging manager events:

 

2016 Emerging Manager Events

February

Consortium West

March

National Association of Securities Professionals

April

National Association of Investment Companies

May

New America Alliance
LOFT Institute Forum/Hispanic Heritage Foundation

June

Association of Asian American Investment Managers

September

GCM Grosvenor Emerging Manager Conference

October

National Association of Investment Companies Conference Green Pearl Women’s Real Estate Forum

In addition, staff regularly meets with emerging managers at LACERS’ offices. During the 2016 calendar year, staff held a total of 36 emerging manager meetings, which included discussions among the following investment asset classes: Public Markets – 25%; Private Equity – 56%; Real Estate – 19%.

Consultants

LACERS retains three investment consultants. The consultant’s respective emerging manager activities for the one-year period ending December 31, 2016, are summarized below.

 

Consultant

Meetings or Calls

Emerging Manager Conferences

Awarded to Emerging Managers

Wilshire Associates Incorporated (General)

637

5

$600.0 million/ 26 managers

Portfolio Advisors, LLC (Private Equity)

150

4

$265.5 million/ 10 managers

The Townsend Group (Real Estate)

56

6

$1.0 billion/ 9 managers

Note: The definition of “Emerging Manager” for this matrix is based on the emerging investment manager criteria unique to each consultant.

3

Reporting Requirement 6: Performance Data of LACERS Emerging Investment Managers (as of 12/31/2016)

Public Markets (Net-of-Fees)

One Year

Two Years

Three Years

Five Years

Since Inception

Oberweis Asset Management, Inc.2 MSCI EAFE Small Cap Index

-4.97 2.55

4.87 6.18

– –

– –

0.80 1.98

Excess Return

-7.52

-1.31

-1.18

EAM Investors LLC3
Russell 2000 Growth Index

4.65 11.32

– –

– –

– –

5.05 12.71

Excess Return

-6.67

-7.66

Private Markets

Emerging Fund Managers

Vintage Year

Net IRR4

Return Multiple

Private Equity

High Road Capital Partners Fund II, LP

2013

11.27%

1.29x

Blue Sea Capital Fund I, LP

2014

-0.03%

1.00x

Oak HC/FT L.P.

2014

13.49%

1.16x

1315 Capital, L.P.

2015

-16.75%

0.82x

New Water Capital Partners, L.P.

2015

-47.26%

0.75x

Angeles Equity Partners I, L.P.

2015

0.99%

1.01x

CenterGate Capital Partners I, L.P.

2015

-9.84%

0.76x

Bain Double Impact Fund, LP

2016

0.00%

0.88x

Sunstone Partners I, L.P

2016

-30.47%

0.79x

Emerging Fund Managers

Vintage Year

Net IRR4

Return Multiple

Private Real Estate

Gerrity Retail Fund 2, L.P.

2015

8.21%

1.07x

Asana Partners Fund I

20175

N/A

N/A

Strategic Plan Impact Statement

The objective to hire and retain Emerging Investment Managers in order to add value to the LACERS investment portfolio is consistent with Goal IV (achieve satisfactory long-term risk adjusted investment returns). The presentation and discussion of the policy goals, metrics, manager outreach, and manager performance information is consistent with Goal V (uphold good governance practices which affirm transparency, accountability, and fiduciary duty).

This report was prepared by Barbara Sandoval, Investment Officer II, Investment Division. RJ:BF:BS:ag

2 Account funded on January 15, 2014. Manager no longer meets the LACERS definition of an emerging manager as of the fourth quarter of 2015; firm assets under management exceed $2 billion.
3 Account funded on October 1, 2015.
4 A private market fund typically yields a low or negative IRR during its early life “J Curve” period.

5 LACERS committed to fund in calendar year 2016.

LACERS – Private Equity Consulting Services Performance Comparison

Private Equity Performance Comparison

Background 

On June 13, 2017, the (LACERS) Board interviewed the two finalists for the Private Equity Consultant Request for Proposal, Portfolio Advisors, LLC (Portfolio Advisors) and TorreyCove Capital Partners LLC (TorreyCove). Subsequent to the interviews and a discussion with staff regarding the finalists, the Board directed staff to acquire additional performance information from both firms to better assess each finalists’ potential to add value to the LACERS portfolio.

Performance Methodology and Evaluation 

Staff requested information based on each finalists’ fund recommendations from the years 2005 to 2013, categorized by buyout, venture capital, and special situations strategies. The information obtained included vintage year performance, commitment sizes and dollar amounts, and quartile rankings based on the Cambridge Associates private equity benchmarks. To determine performance and quartile rankings, the finalists were instructed to equal-weight performance of their fund recommendations in each category (buyout, venture capital, special situations, and total portfolio) by the number of fund recommendations made. The performance evaluation, as attached to this report as Attachment A (the link above), reflects stronger relative performance by Portfolio Advisors.

Strategic Plan Impact Statement 

The Private Equity Consultant assists LACERS in building a diversified portfolio to help the fund achieve a satisfactory long-term risk adjusted return (Goal IV). Implementing a competitive bidding process by issuing a Request for Proposal (RFP) is consistent with Goal V (uphold good governance practices which affirm transparency, accountability, and fiduciary duty).

This report was prepared by Jimmy Wang, Investment Officer I, Investment Division.