Analysts say this is likely a one-off rather than a sign of waning LP interest in the venture.
los angeles The County Employees Retirement Association (LACERA) voted to reduce its allocation to venture capital at its March 13 meeting.
The investment committee voted to reduce the allocation to venture capital and growth stocks from 15 to 30 percent of the pension system’s private equity portfolio to 5 to 25 percent. LACERA’s venture portfolio currently accounts for 10.8% of its PE portfolio.
This is a somewhat puzzling move, as that subset has been incredibly successful, with a TVPI (a measure representing both realized and unrealized profits of the fund’s investments) at the end of 2023 of 2.08x, the highest among private equity portfolios. strategy.
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 vintages from 2012 to 2016. The company has also backed VCs such as: Innovation Endeavors, Storm Ventures, Primary Venture Partners, etc.
Investment director Didier Acevedo cited market conditions as the main reason for the change. He added that he also wants pensions to be more flexible and dynamic in their investments. Given that pensions are currently under-allocated to existing ranges, this move is likely to free up capital for strategies other than a play to reduce the size of the actual venture portfolio.
Analysts told TechCrunch that this was likely a one-off rather than an early sign of an impending trend.
Brian Borton, a partner at StepStone, told TechCrunch that while he cannot provide a comprehensive account of the entire LP community, LPs such as high net worth individuals and family offices invest more liquidly, while LPs such as pensions are less reactive. I’ve never heard of anyone trying to reduce their allocation to a venture. In fact, StepStone is seeing increasing demand for venture services from LPs, he said.
“The pension funds we are talking to see this underfunded opportunity in the venture equity sector as an opportunity to improve access,” Borton said. “U.S. public pension plans have generally lagged in increasing exposure to ventures.”
Moreover, many LPs have learned their lessons since the financial crisis and now know they shouldn’t just take a year off, said Kaidi Gao, venture capital analyst at PitchBook. However, they may invest a smaller amount. Gao said that if VCs, including Insight Partners and Greycroft, raise smaller funds typically backed by LPs, which recently cut their funding targets, LPs could write smaller checks and therefore not need as much money allocated to the strategy. He said it may not be possible.
Additionally, LP will continue to focus on its existing managers. This trend began in 2022 when public markets first began to slump, but many VCs held off on raising funds as long as possible. As more VC general partners enter the market this year, the true extent of LP decline will be felt.
“When volatility is high or there are many uncertain factors in the market, people tend to step away from what they are most familiar with and pursue quality,” Gao said. “For some LPs, especially institutional players, [that means] It just defaults to funding from big brands that have been around for a very long time.”
This also means that many LPs may not be adding any new manager relationships to their portfolios this year. Borton added that if LPs withdraw, they may consider scaling back initiatives rather than allocations.
“These institutions have targeted allocations and are long-term in nature,” Borton said. “They’re not going to cut venture allocations. “To respond to the current market, we have to respond to some extent by slowing down our investments or reducing the number of relationships.”
Neither Borton nor Gao think there will be any major changes in LP allocations to ventures this year. But there will always be exceptions.