Analysts say this is likely more of a one-time event than a sign that LP's interest in the project is waning.
Los Angeles The County Employees Retirement Association (LACERA) voted to reduce the scope of its venture capital allocation at its March 13 meeting.
The Board of Investments voted to reduce the range of its allocation to venture capital and growth stocks from between 15% and 30% of the pension system's private equity portfolio, to between 5% and 25%. LACERA's venture portfolio currently stands at 10.8% of its private equity portfolio.
It's a somewhat puzzling move, as this sub-segment has had tremendous success, with the TVPI – a number representing the realized and unrealized gains of the fund's investment – standing at 2.08x at the end of 2023, the highest of any of the private equity portfolio's sub-sectors. Strategies.
As of the end of 2023, the organization reported that the five best-performing funds of all time in its private equity portfolio were venture funds, including four funds from Union Square Ventures with models spanning 2012 to 2016. The firm also backed venture capital funds Venture money including Innovation Endeavors, Storm Ventures, and core venture partners, among others.
Investment officer Didier Acevedo cited market conditions as the main reason behind the change. He also added that the pension wants to be more flexible and dynamic in its investment. Given that the pension is not currently allocated to its current range, the move will likely free up capital for other strategies, rather than playing to reduce the size of the actual venture portfolio.
Analysts told TechCrunch that this situation is likely more of a one-off than an early sign of an impending trend.
Brian Burton, 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 invest more flexibly while LPs like pensions are less reactive — he did that. I haven't heard of anyone looking to reduce their allocation to the project. He said StepStone is actually seeing an increase in demand for its investment services from limited companies.
“The pension funds we are talking to are looking at this window of weak fundraising in the investment asset class as an opportunity to improve their access,” Burton said. “U.S. public pensions have generally lagged in building their exposure to projects.”
In addition, many limited partners learned their lesson after the Great Financial Crisis and now know not to delay for a full year, said Kaede Zhao, a venture capital analyst at PitchBook. But they may invest smaller dollar amounts. If managers backed by limited partners typically raise smaller funds — venture capital firms including Insight Partners and Greycroft have recently lowered their fund targets — limited partners may write smaller checks and therefore may not need as much money allocated to the strategy, Gao said.
In addition, the limited partners will continue to focus on their existing managers. While this trend began in 2022 when the general market initially began to decline, many VC firms have been holding off on raising money for as long as possible. As more venture capital general partners are forced to enter the market this year, the true extent of LP's decline will be felt.
“In times of high volatility, or when the market has a lot of uncertain factors, we see people resort to fleeing quality, and retreat to what they are most familiar with,” Gao said. “For some limited partners, especially institutional players, [that means] Just defaulting to big name brands, funds that have been around for a very long time.
This also means that many limited partners may not add any new manager relationships to their portfolio this year. If LP pulls out, it may look to scale back initiatives rather than allocate them, Burton added.
“These institutions have targeted allocations and are long-term in nature,” Burton said. “They are not going to reduce their allocation to the project. They need to respond somewhat by slowing down the pace of their investments or reducing the number of relationships to respond to the current market.
Neither Burton nor Gao think we should expect any major changes to the project's LP allocation this year – but there will always be exceptions.
