LACERA recently made a surprising decision to decrease its allocation range to venture capital, from 15% to 30% to just 5% to 25%. However, industry experts believe that this move is not indicative of a larger trend, but rather a one-time adjustment.
The change was announced at a board of investments meeting on March 13, where the pension system’s private equity portfolio was evaluated. The venture portfolio, currently at 10.8%, has been quite successful with a TVPI of 2.08x at the end of 2023, surpassing all other sub strategies.
This success is attributed to investments in top-performing venture funds, including four from Union Square Ventures between 2012 and 2016. The organization has also backed prominent VCs such as Innovation Endeavors, Storm Ventures, and Primary Venture Partners.
Didier Acevedo, LACERA’s investment officer, stated that the change was made due to market conditions and a desire for more flexibility in investing. Notably, the pension system was currently underrepresented in the previous allocation range, so this shift is likely to free up capital for other investment strategies.
Analysts believe that LACERA’s decision is not reflective of a larger trend among LPs (Limited Partners). Brian Borton from StepStone noted that while different types of LPs invest differently, there has been no significant decrease in interest from any group. In fact, StepStone has seen an increase in demand for their venture services.
“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.”
Kaidi Gao, a venture capital analyst at PitchBook, believes that LPs have learned from past experiences and are less likely to sit out during slow fundraising periods. However, they may invest smaller amounts, particularly if the managers they usually back are raising smaller funds.
Gao also points out that LPs will likely continue to prioritize their existing relationships with managers. This tendency has become more prevalent since 2022 and may contribute to a slower pace of new manager relationships in the future.
“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.”
Accordingly, it is unlikely that there will be any significant changes in LP allocation towards venture capital this year. However, there may be exceptions.
Borton adds that if LPs do decide to decrease their investments, they are more likely to trim initiatives rather than their overall 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.”
In summary, while LACERA’s decision to decrease their venture capital allocation range may seem odd, experts believe it is not indicative of a larger trend. LPs continue to have a strong interest in venture and are even seizing the current market conditions as an opportunity for better access to top-performing funds.
However, in uncertain times, LPs may rely more on familiar managers and may not form significant new relationships this year. Overall, LPs are unlikely to make any drastic changes to their venture allocations but may adjust their investment pace and initiatives accordingly.
