The Los Angeles County Employees Retirement Association (LACERA) voted to decrease its allocation range to venture capital at a March 13 meeting.
The board of investments voted to decrease its allocation range to venture capital and growth equity from between 15% and 30% of the pension system’s private equity portfolio, to between 5% and 25%. LACERA’s venture portfolio is currently 10.8% of the PE portfolio.
It’s a somewhat puzzling move, as that subset has been tremendously successful, with a TVPI — a figure representing both realized and unrealized profits of a fund investment — of 2.08x at the end of 2023, the highest of any of the private equity portfolio’s sub strategies.
As of the end of 2023, the organization 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 vintages spanning from 2012 to 2016. The firm has also backed VCs including Innovation Endeavors, Storm Ventures and Primary Venture Partners, among others.
Investment officer Didier Acevedo cited market conditions as the main reason behind the change. He also added that the pension wanted to be able to be more flexible and dynamic with its investing. Considering the pension was currently underallocated to its existing range, this move was likely to free up capital for other strategies, as opposed to a play to reduce the size of its actual venture portfolio.
Analysts told TechCrunch 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 whole LP community with a broad brush — LPs like high net-worth individuals and family offices invest more fluidly while LPs like pensions are less reactive — he hasn’t heard of anyone looking to decrease their allocation to venture. In fact, StepStone is seeing an increase in demand for its venture services from LPs, he said.
“Pension funds that we are talking to are viewing this window of weaker fundraising in the venture asset class as an opportunity to improve their access,” Borton said. “U.S. public pensions have generally lagged in building their exposure to venture.”
Plus, many LPs learned their lesson after the great financial crisis and now know not to sit out a whole vintage year, Kaidi Gao, a venture capital analyst at PitchBook, said. But they might be investing smaller dollar amounts. Gao said if the managers LPs usually back are raising smaller funds — VCs including Insight Partners and Greycroft cut their recent fund targets — LPs may be writing smaller checks and thus may not need as much money allocated to the strategy.
In addition, LPs will continue to focus on their existing managers. While this trend started in 2022 when the public market initially began to sour, many VCs were holding off on fundraising as long as they could. As more VC general partners are forced to go into market this year, the real scope of the LP pullback 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, just falling back on what they are most familiar with,” Gao said. “For some of the LPs, especially institutional players, [that means] just defaulting to the large name brands, the funds that have been around for a very long time.”
This also means that many LPs may not add any new manager relationships to their portfolio this year. Borton added that if an LP does pull back they may look to trim initiatives as opposed to their allocation.
“These institutions have target allocations and they are long term in nature,” Borton said. “They aren’t going to cut their venture allocation. They need to react to some extent by slowing down their investment pace or trimming the number of relationships to kind of respond to the current market.”
Neither Borton nor Gao thinks we should expect any significant changes for LP allocation into venture this year — but there will always be exceptions.
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