LACERS Sets Plan for Pacing Private Investment


Michael Wilkinson, LACERS/Legal Representative

By Michael R. Wilkinson, LACERS Commissioner

Last May, the LACERS Board increased its allocation to private equity from 14 percent to 16 percent of the total fund.

LACERS depends on good performance from private equity, which traditionally has high returns, but fees are higher and investment returns are more volatile, meaning investors must expect markets to go up and down more than in traditional investments. As they say, there are no “free lunches” in investing; to get higher returns you must accept some greater risk.

In the most recent fiscal year (ending June 30, 2021) private equity returned a stunning 55 percent for the year, 19 percent for three years, 17 percent for five years and 14 percent for 10 years. The investment returns will not be like this every year!

However, like all investments, it pays to diversify. One of the key strategies to diversify private equity is when you invest. Like fine wines, private equity investments are spread out by vintage years. Some years are very profitable, and some are not. When you make an investment, it is not clear if a year will be great or a dud, so you spread the investments over the years.

LACERS has chosen to make the increase from 14 percent to 16 percent over five years on an almost equally weighted basis. In 2021, the investment pace will be $1.1 billion, then followed by $1.375 billion in the next three years and finally $1.0 billion in 2025.

Sometimes it is hard to deal with the big numbers for the size of our investments. I am reminded of the great comment attributed to the late Sen. Everett Dirksen, “A billion here, a billion there, pretty soon you are talking real money.”

While vintage year investing for private equity does not guarantee high returns, it does reduce the probability that you will be putting “all your eggs in one basket” by investing heavily on a vintage year that turns sour.