CalPERS 2019 PE returns slowest in decade – consultant

The Wilshire Associates report comes amid continued questions about the future of the $390bn fund's private equity program.

California Public Employees’ Retirement System’s $26 billion private equity program saw its slowest return pace in a decade in 2019, according to a presentation from its investment consultant set to be delivered at its meeting next week.

“Results of the private equity asset class showed a precipitous drop in the second half of 2019,” said the report from general investment consultant Wilshire Associates.

Private equity returns last year were 3.5 percent in the second quarter, 1.4 percent in the third quarter and 0.2 percent in the fourth.

“Coupled with a rare loss of -2.1 percent from Q1, private equity finished 2019 on a 2.9 percent cumulative return that was its slowest annual pace in this past decade, while also ranked the smallest among all CalPERS major asset classes save for liquidity,” the Wilshire report said.

Additionally, as of December 31, CalPERS’s private equity program had 11 percent returns over three years, 9 percent over five years and 12.4 percent over 10 years. These results lagged the CalPERS benchmark for all time periods except one-year returns, where the 2.9 percent return barely lagged its 2.6 percent benchmark.

For CalPERS’s total fund, one-year returns were 17.3 percent, three-year returns were 4.9 percent and five-year returns were 3.5 percent.

Performance breakdowns

An accompanying presentation from private equity consultant Meketa Investment Group broke out the portfolio’s performance by investment structure. Eighty-four percent of the portfolio was in fund investments, 10 percent in customized investment accounts, 6 percent funds of funds and secondaries and less than 1 percent in co-investments and direct investments. CalPERS recently re-launched its co-investment program after several years of dormancy, as Buyouts reported.

Meketa said fund investments performed well but co-investments outperformed all other investment structures across the three-year, five-year and 10-year time periods.

“Due to the concentration of the co-investment/direct investment portfolio, a small number of substantial investments tend to drive performance,” the Meketa report said. Funds of funds and secondaries posted negative one-year returns and lagged the broader PE program over all time periods.

Among strategies, Meketa reported that the buyouts and growth strategies outperformed the broader PE program. CalPERS’s tiny venture portfolio, which Buyouts recently wrote about, broadly underperformed. Credit “has generally underperformed” across the one-, three- and five-year periods, the report said.

CalPERS hiked its commitment activity significantly in 2019, committing $6.9 billion, up from $4.2 billion in 2018 and the largest amount since 2008, when $11 billion was committed. As of December 31, the PE program was still underweight, making up 6.6 percent of the full fund portfolio against an 8 percent goal.

In-house program on hold?

The relatively poor private equity returns come a year after the CalPERS board pledged to move ahead with an ambitious plan to create two $10 billion private equity funds that would be run by outside staff with CalPERS as the sole LP, as Buyouts reported.

Almost no news has come out since then. Board president Henry Jones said last year two potential managers were chased away due to press coverage, as Buyouts reported. Chief investment officer Ben Meng said in a Reuters interview last year that there were “no specific timelines” on when the funds would be launched, as Buyouts reported. A separate Meketa report from late last year listed the in-house funds among possible strategies for growing the PE program, as Buyouts reported.

CalPERS’s board and committee meetings are next week, with the investment committee set to meet March 16.

CalPERS PE chief Greg Ruiz is set to provide an update on the PE program at next week’s meeting, but it will be in closed session. Meng will also give an investment strategy presentation called “Toward a 7% Solution,” referring to CalPERS’s target yearly return, also in a closed session.

CalPERS had no comment for this story. According to its website, the fund’s current value is $390 billion.

Action Item: Read the Wilshire Associates presentation here and the Meketa presentation here.