Exclusive: Los Angeles Water and Power CIO Explains Strategy Behind Its ‘Young’ Private Equity Portfolio

Jeremy Wolfson

After setting up a $400 million private equity pacing plan for the year, the Los Angeles Water and Power Retirement Plan’s Chief Investment Officer Jeremy Wolfson discussed the pension’s strategy for its relatively new private equity program.

“It’s still a young portfolio experiencing some j-curve,” Wolfson told CIO of the 12-year-old allocation, “however, having the dry powder to deploy during various economic and market environments, instead of simply having to recycle distributions, has enabled us to perform very well over the years.”

The new pacing plan calls for $400 million across four to seven partnerships, with each commitment valued between $50 million and $125 million throughout the year. “We take calculated but slightly more concentrated risk by typically investing in larger bite sizes with less funds and GPs,” Wolfson added.

“This overall portfolio construction thesis has resulted in generating more alpha instead of having a large number of smaller investments that could result in simply receiving private equity beta exposure, which could limit our ability to move the needle in any material way.”

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The retirement fund’s total fiduciary net position for the retirement fund measured at $12.3 billion as of its latest annual report dated June 30, 2018. The private equity program generated one-, three-, and five-year returns of 12.67%, 9.77%, and 11.22%, respectively, at that time. Its private equity pacing plan to maintain the allocation as close as possible to the 8% target is illustrated below:

“Our focus late cycle is to continue to deploy capital with high conviction GPs that have proven their ability to create value over multiple cycles with less or limited leverage in the middle market and small-cap buyout space,” Wolfson said. “We also look for co-invest opportunities with the right partners to enhance overall deal economics.”

In 2018, commitment activity for the portfolio was “within target,” according to a report from the pension. It committed $63 million to Crestview Partners IV, $85 million to Harvest Partners VIII, $22.5 million to Industry Ventures Special Opportunities Fund III, and $75 million apiece to Lexington Capital Partners IX and Vista Equity Partners Fund VII.

“Although we invest globally, we’re still fairly US-centric. We still believe in US fundamentals but are sensitive to late-cycle investment strategies that are slightly more defensive and idiosyncratic. We will also continue to look for non-US opportunities as we look to diversify our exposures.”

Private equity is gearing up to be a relatively more robust sector than it is today, with pensions such as the California Public Employees’ Retirement System (CalPERS) creating proprietary platforms to invest in the asset class.

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Tags: Jeremy Wolfson, Los Angeles Water and Power Retirement Plan, Pension, Private Equity

The UK’s Financial Conduct Authority (FCA) has published information for firms in various sectors about how they will be affected by Brexit, and what actions they may need to take once the country leaves the European Union.

The information is specific to banks, pensions and retirement income firms, general insurance firms, retail firms, and asset managers operating in the UK.

The regulator has also published a series of consultation papers to help ensure a functioning regulatory framework for financial services if the UK leaves the EU without a withdrawal deal or implementation period, also known as a “no-deal Brexit” scenario.

“The FCA has been preparing for a range of scenarios, including the possibility that the UK leaves the EU in March 2019 without an implementation period,” Nausicaa Delfas, executive director of international at the FCA, said in a statement. The documents “ensure that there is a functioning regulatory regime from day one, and that firms are clear as to the requirements they need to meet by end March 2019 and beyond.”

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The FCA said that because many UK life insurers write pensions, retirement income, life insurance, and long-term protection business for customers who are based in the European Economic Area (EEA), one of its key areas of focus is making sure these firms can serve their customers in a no-deal situation.

“If you have customers in the EEA, you need to decide on your approach to servicing your existing contracts with them,” said the FCA. “You should take the steps available to you to continue to service customers in accordance with local law and national regulators’ expectations.”

The European Insurance and Occupational Pensions Authority (EIOPA) has published recommendations for the insurance sector regarding the UK’s withdrawal from the EU. The recommendations are addressed to national regulators and are intended to help minimize detriment to policyholders and beneficiaries in a no-deal scenario.

Among its suggestions, EIOPA recommends that life insurance contracts between UK firms and UK-based customers who subsequently move to the EEA, should not be regarded as cross-border business. This includes existing pension contracts in accumulation that contain a right or option for policyholders to realize their pension benefits.

While the FCA said it welcomes this recommendation, it cautioned that firms should be aware that whether they need regulatory permissions in a local EEA jurisdiction will depend on local law and the approach of the local authorities in that jurisdiction.

For UK firms in the banking and payment sectors, the FCA said they should have contingency plans for a range of scenarios, including the possibility that the UK will no longer remain within the geographical scope of Single Euro Payments Area (SEPA). The FCA said firms should take steps to continue to service customers in the in the EEA in accordance with local law and national regulators’ expectations.

“We are clear that firms’ decisions need to be guided by what is the right outcome for their customers,” said the FCA. “In many cases, it would be a poor outcome for the consumer for you simply to stop servicing them, for example, for you to withhold payments to consumers to which they are entitled.”

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Tags: Brexit, Financial Conduct Authority, UK