Los Angeles City Employees' Retirement System Emerging Investment Manager Program November 28, 2017 Carolyn Smith, Partner Kevin Novak, Consultant Michael Malchenko, Senior Analyst 1
LACERS Current Emerging Investment Manager Policy Public Private Equity, Real Estate Markets Real Assets, Credit Opps Firm has <$2 billion AUM X Firm must have >$50 million AUM in strategy X Firm in existence for a minimum of one year X X X If track record < 5 years, may use prior track record X X X from prior firm with caveats Employee ownership at least 51% X X X LACERS portfolio size <20% of strategy AUM X First or second fund for General Partner X X General Partner <$500 million plus unfunded X X commitments firm-wide assets at the time of LACERS commitment Fund has a minimum of $100 million X No Limited Partner >30% in total fund capital X X LACERS commitment of the final close <10% or $20 X X million, which ever is lower Minimum $150 million committed capital including X LACERS commitment Copy of the full policy can be found in the Appendix. 2
LACERS Current Emerging Investment Manager Policy Public and Private Market Goals • Aspirational goal of 10% for public and private market asset classes – Public Market Asset Class Metric: total dollars to Emerging Managers divided by asset class • dollars Public Market Manager Search Metric: total dollars approved for Emerging Managers • divided by total dollars awarded in completed searches Private Markets Asset Class Metric: committed dollars to Emerging Managers divided by • committed assets to the asset class Private Market Manager Search Metric: committed capital to Emerging Managers divided • by committed capital in the same private market asset class over rolling 36-month periods Provisions for Post-Emerging Firms • Public Markets – Firms that grow beyond $2 billion in assets under management are eligible for larger-sized • mandates assuming they meet the Manager Search and Selection criteria Private Markets – Firms raising capital for funds beyond first- and second-time funds will be considered • assuming that the strategy meets LACERS criteria Reporting • Annual check up on status of Emerging Managers hired and retained by LACERS – Check up includes discussion of efforts to increase exposure to Emerging Managers – Practice includes staff and consultants review of: • Meetings taken – Conferences attended – Mandates awarded – Copy of the full policy can be found in the Appendix. 3
California Public Funds with Emerging Manager Policies Total Pension % of AUM Plan Name Definition Plan Limits Comments Assets ($ millions) Limitation No more than 1% of Policy covers U.S. equities, international the total Plan with equities and fixed income. The policy Alameda County Employees' Retirement 7,500 Firms <$2B AUM the ability to change identifies that Directly hired managers Association (ACERA) this amount over should have assets less than $3 billion and time have been in business less than 5 years. Global Equity and 2012 law required the fund to develop a 5 Global Fixed Income year plan and annual updates for emerging California Public Employees' Retirement 344,187 ‐ Firms <$2B AUM, manager participation in the plan. Have Systems (CalPERS) no minimum in the separate definitions for private equity, product hedge funds real assets and real estate. 2012 law required the fund to develop a 5 year plan and annual updates for emerging California State Teachers' Retirement Global Equity ‐ 215,318 manager participation in the plan. Have System (CalSTRS) Firms <$2B AUM separate definitions for private equity, REITS and real estate. Firms must also have been in business at Firms <$2B AUM, Los Angeles City Employees' Retirement <20% of product at Aspiration goal of least one year. Firms must have employee 16,700 with a minimum of System (LACERS) time of funding 10% per asset class ownership greater than 49%. Have separate $50 M in the product criteria for private markets. Firms must also have employee ownership greater than 49%. Portfolio managers should Firms <$2B AUM and have at least five years of experience and 5 Los Angeles County Employees' Min ‐ 0% and Max ‐ 50,329 >$25 M in the <40% of product year product track record. Separate criteria Retirement Association (LACERA) 4% product for real estate and private equity. Max 5% US Equities, 4% Fixed Income, 20% Real Estate, 3.5% Private Equity. Firms <$2B AUM, Firms must also have been in business at Minimum of $30 M least one year. Portfolio managers should Los Angeles Fire & Police Pension <50% of pruduct at 21,519 institutional assets have at least five years of experience. System time of funding and $10 M in the Outline separate criteria for real estate and product private equity. Firms <$2B and independent (51% Preference for Manager ‐ of ‐ manager San Francisco City & County Employees' Up to 10% of an 23,476 owned by programs. Asset class coverge includes all Retirement System (SFERS) asset class employees of the public market asset classes. firm) Source: Money Market Directory, each Plan's investment policy statement as posted on their website. 4
Structuring an Emerging Manager Program Manager-of-Manager Program Direct Program Pros: Pros: Ease of implementing and Control over which managers • • tracking progress of the are hired program Ability to customize program • Diversification by firm design, underwriting criteria • and guidelines Additional layer of research and • operational due diligence Potential for lower fees • Reduce monitoring by staff – Cons: Cons: Wider range of fees • Additional time required for due • Not all programs introduce a higher diligence and monitoring – than median fee Balance between direct agency of – Potential for dual layer of fees – control vs. resources Need to negotiate amount of • Fewer firms utilized in the • customization in program program design Concentration by firm – Input on firms hired and guidelines – Performance may have lower • tracking error due to blending results of multiple managers May be attractive to some investors – 5
LACERS Emerging Investment Manager Program Criteria Screening – Public Markets Firms After EM Products After EM Total Firms in Total Products in Asset Class Geographic Focus Style (Cap/Duration) Screen Screen Universe Universe Equity USA Large Cap 98 124 597 1716 Equity USA Small Cap 77 85 450 827 Equity ACWI ex US All ‐ Cap 12 16 220 418 Fixed Income All All 48 108 715 4807 Fixed Income USA Core/All Duration 18 24 260 668 LACERS Emerging Manager Criteria Screening eVestment Universe of broad public markets asset classes were • screened using LACERS minimum criteria as of 9/30/2017 The supply of emerging investment managers is larger than what the screening – suggests as many firms don’t show up in the database due to being new or not having the infrastructure to report Larger plans with emerging manager programs have shifted emphasis • away from US Large Cap and Fixed Income and towards asset classes that are capacity constrained including non-US small cap, emerging markets, US small cap, private equity and hedge funds 6
Best Practices for Structuring an Emerging Manager Program Commitment to the program • Leadership and championship from Board and staff – Develop a clearly articulated statement of investment beliefs around why Emerging • Manager Program is important Key is to agree on what a successful program looks like – Set clear evaluation metrics for risk and return • No different than rest of the portfolio – Determine reasonable time frame for success • Resources/Outreach • Don’t expect that having an open door policy will be enough to identify good firms and – products Identify resources for the program – Measurement of the program • Establish regular intervals and reporting to check in on progress – Track actions and efforts – Accountability by all parties involved should ensure an even playing field • Continually re-assess, confirm and refine approach – 7
Appendix 8
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