ATTACHMENT A Los Angeles County Employees Retirement Association March 16, 2020 Real Estate Presentation Christy Fields Christy Gahr Brandon Jernigan Managing Principal Principal Vice President Head of Real Estate Real Estate Manager of Performance Analytics Portfolio Solutions BOSTON CHICAGO LONDON MIAMI NEW YORK PORTLAND SAN DIEGO MEKETA. COM
Executive Summary
Los Angeles County Employees Retirement Association Scope of Work I. Review Staff’s reconciliation process and Met with RE Staff to develop nuanced understanding of • performance data issues. calculations to ensure that net asset values Assisted RE Staff with organization and methodology • and performance figures are accurate for all of reconciliation effort. Participated in regular calls to review status of work. • historical periods reviewed. Assessed historical performance book of record • activities relative to industry best practice. II. Identify best practices for real estate Interviewed various LACERA Staff members to better • operations, including reconciliation and understand internal processes in real estate and other asset classes. reporting. Recommend one or more operating Reviewed Investment Policy, Townsend reports, and • frameworks for LACERA to consider. Staff BOI memos to understand history of the real estate program. Reviewed sample investment management • III. Evaluate book of record best practices as it agreement, portfolio performance hurdles and relates to LACERA’s real estate program. separate account fees to understand vehicle structure and alignment of interests. Reviewed annual Management Investment Plans and • all Manager Meeting materials to understand portfolio strategy. IV. Evaluate LACERA’s real estate business model Assessed historical portfolio performance relative to • the benchmark and other available investment for efficiency and efficacy. vehicles. Interviewed separate account managers for additional • context. 3 MEKETA INVESTMENT GROUP
Los Angeles County Employees Retirement Association Summary of Findings and Recommendations Summary of Findings There were reporting errors that occurred as a result of the real estate performance book of record • arrangement, but no evidence of intent to misrepresent market values or performance. Insufficient internal processes and controls contributed to reporting errors. • No one person or party was responsible for the integrity of the real estate performance data. • LACERA’s real estate implementation model which relies heavily on separately managed accounts and • “funds of one” has generally not produced expected risk-adjusted returns. Recommendations Align the performance reporting processes of the real estate program with those of LACERA’s other asset • classes to bolster controls and uniformity of the performance book of record. Develop formal, written desktop procedures to guide the real estate program’s operations. • Proceed with RFP for third-party administration services provider to augment reinforced internal • processes. Refine real estate implementation model to (i) better support investment objectives, (ii) incorporate best • practices around portfolio construction and alignment of interests, and (iii) align with the size and skills of investment team resources. 4 MEKETA INVESTMENT GROUP
Scope of Work / Reconciliation Review of Staff Process
Los Angeles County Employees Retirement Association Scope of Work / Reconciliation Review Review of Staff’s Reconciliation Process Meketa provided up-front guidance and periodic feedback throughout the reconciliation process around critical elements, recommended processes, and results of the reconciliation process. Meketa Summary Observations Discrepancies between the Townsend real estate performance book of record and State Street Bank data: Were numerous and material. • Varied widely in underlying cause. • Occurred across investment vehicle types (separately managed accounts, funds of one, and • commingled funds) and sub asset classes (i.e., real assets, growth, credit). Represented both positive and negative impacts to the portfolio value and/or returns. • Arose and persisted as a result of errors and/or lack of controls across the various parties. • Exhibited no clear pattern or intent to misrepresent. • 6 MEKETA INVESTMENT GROUP
Los Angeles County Employees Retirement Association Scope of Work / Reconciliation Review Reconciliation Process Outcomes The identification and investigation of the vast majority of prior period adjustments and their impact on • investment-level, sub asset class-level, and portfolio level returns. Materially improved confidence in historical real estate performance and valuations. • Identification of the primary causes of historical discrepancies: • Staff, consultant and managers each playing a discrete role. – Lack of coordination among parties. – No one party managing the performance book of record. – One-time adjustment to both the State Street and Townsend data sets to bring them into alignment for • go-forward performance reporting purposes. Development of new desktop procedures to enhance control, oversight and accountability of real estate • reporting function. 7 MEKETA INVESTMENT GROUP
Scope of Work / Best Practices Operations, Including Reconciliation and Reporting
Los Angeles County Employees Retirement Association Real Estate / Best Practices Operations Operational Best Practices Implementing strong operational processes and controls is essential to appropriately monitoring and reporting on any Real Estate portfolio. Errors in the recording of cash flows or valuations for any given investment can have an impact on both the accuracy of performance reporting for the given investment and the portfolio as a whole. Additionally, ensuring the appropriate items are monitored and reported on regularly is essential to truly understanding the performance of a portfolio. When implementing appropriate operational best practices, attention should be paid to: Performance Calculations • Document Storage • Reporting Elements • Cash Flow Coordination • Cash Flow and Valuation Reconciliations • Annual Budgeting and Planning • 9 MEKETA INVESTMENT GROUP
Los Angeles County Employees Retirement Association Real Estate / Best Practices Operations Performance Calculations The IRR (internal rate of return) is the most meaningful measure of performance for any closed-end fund, where the manager controls the timing of capital deployment and repatriation. IRR measures how assets are performing with respect to how investment managers deploy and return capital to investors — which is the most critical element of analyzing, and reporting on private market investments. Because most multi-asset, multi-manager portfolios are also evaluated on a time-weighted basis using the modified Dietz formula as the prevailing methodology, it is also important to understand the introduction of “lag” in terms of time weighted performance. Time-weighted performance may use the last official valuation and cash flow adjust between valuation periods which is what creates the “lag” in the portfolio. 10 MEKETA INVESTMENT GROUP
Los Angeles County Employees Retirement Association Real Estate / Best Practices Operations Document Storage All relevant fund and plan documents should be stored for a seven-year period. Plan Documents Quarterly Capital Statements • Cash Flow Statements • Management and Incentive Fee details • Subscription & Legal Agreements (detailing commitment amounts and agreed to terms) • Fund Documents Quarterly Financial Statements • Quarterly Reports • 11 MEKETA INVESTMENT GROUP
Los Angeles County Employees Retirement Association Real Estate / Best Practices Operations Essential Reporting Elements There are some reporting elements that are essential to an informative investment presentation with respect to performance, capital accounting, and valuation. These items should be considered indispensable to ensure reporting paints a complete picture of investment performance. Essential performance elements: IRR • Net Multiple • Essential capital account elements: Total Commitment • Contributions • Distributions • Current Unfunded Commitments • Essential valuation elements Current valuation • These reporting elements should also be presented on an investment by investment basis, in addition to the aggregate level information detailed above. Commitment amounts, contributions, distributions, unfunded commitments, current valuation, and relevant performance elements should be present for each investment on every investment presentation. 12 MEKETA INVESTMENT GROUP
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