Distressed market volatility weighs on LA pension's PE returns

Energy-related losses also hampered investment performance in recent months. 

 

The Los Angeles Water and Power Employees' Retirement Plan private equity portfolio, which includes private credit, has posted below-benchmark returns for all time periods measured at the end of the third quarter, according to March meeting documents .

The southern California pension fund's private equity investments performed under target for the one-, three-, five- and 10-year returns, which were hampered over the last year by volatility in the distressed debt market and losses in energy-related investments. LAWPERP's uses the Russell 3000 Index plus 3 percent as its indicator for its private equity returns.

LAWPERP's one- and three-year returns were 5.3 percent and 9.4 percent, respectively, while the pension fund's modified index returned 18.1 percent over the last 12 months and the three-year performance was 12.4 percent.

The five- and 10-year performance results were returns of 9.7 percent and 8.8 percent against the benchmark posted figures showing 16.7 percent and 12 percent, respectively. The returns since the portfolio's inception were also 8.8 percent for the LAWPERP's portfolio and 12 percent for the altered indicator.

LAWPERP could not be reached for comment. Each of the specific returns listed in the documents were as of 30 September.

Volatility in the distressed debt market contributed to the fund's depressed returns, the documents showed. Ares Special Situations IV showed a 28.1 percent loss, though it launched in 2015, meaning it is a little too early to tell whether those performance figures will be indicative of long-term performance. LAWPERP invested $50 million in the $1.5 billion vehicle in February 2015.

Its two energy funds, both managed by EnCap Investments, have each posted negative returns. 

The firm, a venture capital provider to independent oil and gas industries, posted a 6.3 percent loss since inception for its EnCap Energy Capital Fund VIII and 9.8 percent loss for Fund X. 

A source familiar with the matter said EnCap's Fund VIII is near cost on a net basis, and that Fund X experienced a valuation increase that put it in positive territory at the end of the year.

LAWPERP contributed $12.5 million to the $3.95 billion Fund VIII in February 2011, while it committed $37 million to the $6.5 billion Fund X in March 2015. Because Fund X's vintage year is more recent, it may also be too early to draw conclusions on the fund's long-term performance.

Crestview Partners' third fund, launched in 2014, also has exposure to the energy industry though the vehicle's investments are not focused solely on that sector. CP Energy and W Energy Partners are among Crestview Partners III's largest investments. The fund has posted a 7.2 percent loss since inception. LAWPERP made a $50 million commitment in January 2015 to the $3.11 billion fund.

Representatives for Ares, EnCap and Crestview could not be reached for comment.

LAWPERP allocated capital to additional Ares and EnCap funds that have posted positive returns. The Ares Corporate Opportunities Fund IV has posted a 12.7 percent net IRR since its 2012 vintage year, while EnCap's Fund IX returned a 13.9 percent net IRR since its 2013 vintage year.

Longer-term trends that have hampered private equity returns include the robust comeback in public equity markets, with which the private market has had trouble keeping pace.

Outlooks for 2017 suggest the possibility for a tenuous improvement in the distressed market. According to a 2017 North American distressed debt market outlook from trade publication Debtwire , corporate defaults are expected to rise, but those professionals surveyed indicated they will be exercise “caution” this year.

That is a marked change from the beginning of 2016 when the markets started out the year with continued turbulence, something that buoyed distressed investors' expectations for the year. Of course, that didn't come to fruition, even with the aid of Brexit.

Among those polled, which included hedge funds, private equity firms, institutional investors and sell-side trading desks, 51 percent said they plan to set aside more capital earmarked for the oil and gas industry. It was also their top industry choice for distressed.

LAWPERP manages $10.05 billion in assets as of 30 June.