CalPERS developing a plan to reboot PE co-investments

  • CalPERS stopped co-investing in 2016
  • Developing new approach to vetting co-investments and deciding when to lead deals
  • Recently hired a new managing director for PE

California Public Employees’ Retirement System in June will present the board with a new co-investment strategy, including a new method for vetting co-investment opportunities and deciding how active to be on a deal, according to CIO Ben Meng.

CalPERS stopped co-investing in 2016, as part of the same long-term review of PE that led it to pursue the creation of two new CalPERS-controlled funds, Meng said at the $360 billion pension’s May investment committee meeting.

That decision drew criticism from Board Member Margaret Brown, who was not on CalPERS’s board at the time and has called co-investment low-hanging fruit in CalPERS’s effort to make its PE investing more effective.

“It’s critical that we staff up and develop those skills as we move forward,” Brown said. “I just think it’s a shame that we abandoned something that was working for us in 2016, but maybe we can get right back to where we were, and keep on growing.”

Co-investing has been a major theme among LPs looking to get more out of their PE portfolios. CalPERS’s sister pension, California State Teachers’ Retirement System, has said it intends to double its pace of co-investments.

CalPERS doesn’t want to be left behind, as co-investments can help the pension reduce the management fees and carried interest it pays in its PE portfolio, and also offer more insight and control than traditional pooled-fund investments, Meng said.

“Both transparency and control will be increased to CalPERS to the investment staff,” Meng said.

CalPERS had an inconsistent history with co-investments before 2016, according to Meng.

In the 1990s, CalPERS began co-investing, with one or two commitments a year, but “did not adopt or did not develop systematic efforts.” The early 2000s saw CalPERS take an opportunistic approach that saw the level of commitment vary wildly from year to year.

In 2011, CalPERS began a more dedicated co-investment effort and saw better results from co-investments until the program was suspended in 2016, Meng said.

For future co-investments to succeed, CalPERS will need a more consistent approach, Meng said.

“For a long-term strategy, as a long-term investor, we need to adopt a steady deployment of capital approach, regardless of the market cycle,” Meng said.

CalPERS will also need to ensure that its co-investment portfolio is appropriately diversified, by vintage year, by manager, by industry sector, and by geography, and to build up credibility with GPs that offer co-investments. CalPERS can help itself stand out from the growing crowd of LPs demanding co-investments by demonstrating a fast and consistent process for responding to co-investment opportunities, Meng said.

To do that, CalPERS will need to hire more PE staff and may need to reorganize its staff as well, Meng said.

Some board members asked about the role of ESG in the upcoming co-investment strategy. Meng replied that co-investments, by their active nature, will enable CalPERS to ensure that its ESG preferences are followed in specific investments.

Beth Richtman, managing director of CalPERS’s sustainable investment program, said GPs are already thinking about ESG when they do deals, paying close attention to risks like labor issues that can damage a company’s brand and hurt returns.

Action Item: View CalPERS’s recent presentation to the board on its co-investment history: