After all, the California Public Employees’ Retirement System is the LP bellwether, right? And as it goes, so does the rest of public pension, USA.
I’m here to tell you not to worry too much about it. CalPERS has been doing this for a long time. The system follows its own path when it comes to private equity and just now, it’s focused on more structured, tailored service.
This is the way it is with certain big LPs in the market.
CalPERS has been reducing PE basically since I started covering the asset class in 2008. The world got hit with the global financial crisis and certain practices were exposed, including pay-to-play arrangements at CalPERS. The system went through some major introspection, letting certain high ranking PE officials go, muscling better deals out of managers, and cutting ties with other managers.
These days, CalPERS is more focused on forming big accounts with only a few managers – putting more money into its best performing, most trusted relationships. Through that type of structure, the system can negotiate better economics and get more direct exposure to deals.
CalPERS’ moves are similar to other big LP institutions like sovereign wealth funds bulking up internal resources to handle private equity their own way, through co-investing, direct investments, opportunistic secondary buys and the occasional fund commitment to an especially trusted or valued manager.
The question is: Will other U.S. public pensions follow? I think some will, some big ones, with mature portfolios. But not everyone.
For example, in this issue of Buyouts we dig into Oregon’s state pension, one of the first to invest in private equity. The system recently cut its allocation target to private equity from 20 percent to 17.5 percent because of diminished returns, liquidity concerns and limited staff resources.
New York City’s pension system also is considering various options for its private equity program after the Comptroller discovered returns are not so great after factoring in all the fees. The system, which has been running with a shoestring private equity staff for several years, hired Cogent Partners recently to help it structure a sale of part of its private equity portfolio.
Pennsylvania’s state workers’ pension is another one dialing back its exposure, trying to go from a max allocation percentage of around 27 percent to 14 percent over a number of years.
However, while these institutions are cutting back, other, smaller pensions are trying to ramp up their private equity. And in that sense, this shift of big systems to cull exposure to the asset class might have more to do with how quickly they ramped up their own exposure. Perhaps it’s more of a re-balancing than a major statement about how these systems feel about private equity.
After all, CalPERS is completely bailing out of hedge fund investing. That is not the case for private equity. In fact, none of the systems that are cutting back have said their goal is to eventually exit the asset class for good.
And if you’re looking for some good news, there are more than a few smaller systems making big PE plays.
The Maine Public Employees’ Retirement System, the Tennessee Consolidated Retirement System, Georgia’s state workers’ pension, and the New Hampshire Retirement System are some of the younger, hungrier public pensions building their programs.
It’s like the cycle of life: As more mature LPs scale back, slow down or try to shed a few pounds, the younger ones move in to take their place.