Analysts say this is likely more of a one-off than a sign that the LP’s interest in the venture is waning.
Los Angeles The County Employees Retired Association (LACERA) voted to reduce its allocation to venture capital March 13 meeting.
The Board of Investments they voted reduce its allocation to venture capital and growth equity from between 15% and 30% of the pension scheme’s private equity portfolio to between 5% and 25%. LACERA’s business portfolio is currently 10.8% of the PE portfolio.
It’s a somewhat puzzling move, as this subset has been wildly successful, with a TVPI – a figure that represents both the realized and unrealized earnings of a mutual fund investment – of 2.08 times at the end of 2023, the highest of any of the subcategory of the private equity portfolio strategies.
As of the end of 2023, the agency reported that the five all-time best-performing funds in its private equity portfolio were venture funds, including four funds from Union Square Ventures with returns from 2012 to 2016. company has also backed VCs like Innovation Endeavors, Storm Ventures and Primary Venture Partners, among others.
Investment manager Didier Acevedo cited market conditions as the main reason behind the change. He also added that the pension wants to be able to be more flexible and dynamic with its investments. Given that the pension was not currently allocated to its existing range, this move was likely to free up funds for other strategies, as opposed to a play to downsize its real business portfolio.
Analysts told TechCrunch that this situation is likely more of a one-off than an early sign of an impending trend.
Brian Borton, a partner at StepStone, told TechCrunch that while you can’t paint the entire LP community with a broad brush — LPs like high-net-worth individuals and family offices are more liquid investors while LPs like pensions are less reactive – it hasn’t I haven’t heard of anyone wanting to reduce their share of the business. In fact, StepStone is seeing an increase in demand for its business services from LPs, he said.
“The pension funds we’re talking to see this window of weaker fundraising in the venture capital category as an opportunity to improve their access,” Borton said. “U.S. public pensions generally lag behind in their exposure to businesses.”
In addition, many LPs learned their lesson after the great financial crisis and now know not to rest for a whole vintage year, said Kaidi Gao, venture capital analyst at PitchBook. But they may invest smaller dollar amounts. Gao said that if managers who typically back LPs raise smaller funds — VCs including Insight Partners and Greycroft have lowered their recent fund targets — LPs may be writing smaller checks and thus may not need as much money set aside for the strategy.
Additionally, LPs will continue to focus on their existing managers. While this trend started in 2022, when the public market first started to deteriorate, many VCs held off raising funds as much as they could. As more VC general partners are forced to come to market this year, the true extent of LP withdrawal will be felt.
“In times of high volatility or when the market has a lot of uncertain factors, we see people resorting to a flight of quality, they just fall back on what they are more familiar with,” Gao said. “For some of the LPs, especially institutional players, [that means] just going against the big name brands, the funds that have been around for a long time.”
This also means that many LPs may not add new manager relationships to their portfolio this year. Borton added that if an LP withdraws, it may look to limit initiatives as opposed to allocating them.
“These foundations have targeted endowments and are long-term,” Borton said. “They are not going to cut their venture allocation. They have to react to some extent by slowing their investment pace or reducing the number of relationships to meet the current market.”
Neither Borton nor Gao believe we should expect significant changes to the allocation of LP to venture this year — but there will always be exceptions.
