CalPERS eyes secondaries, co-investing to boost PE exposure

  • Consultant: Fund has not pursued co-investment or secondary purchases in recent years
  • CIO to present co-investment research to board
  • Co-investment, secondaries and fund-of-funds are just 5 pct of CalPERS’s unfunded commitments

California Public Employees’ Retirement System is looking for more traditional ways to boost its exposure to private equity, including buying secondaries and increased co-investing.

Even as CalPERS explores plans to launch its own captive private equity funds, the $354 billion retirement system could benefit from opportunistic reengagement with secondaries and co-investment, according to its PE consultant, Meketa.

“It’s been distressing that we haven’t done it over the past several years,” said CalPERS Board Member Margaret Brown at the system’s February investment committee meeting.

“But whatever the staff needs or whatever you can do to help us pick that low-hanging fruit, let us know, and I’m sure a lot of the board members here are supportive of that as well.”

CIO Ben Meng, who took charge of the CalPERS investment office in January and who supports the larger PE overhaul, said the office is looking at those opportunities.

“We need to continue to explore how we can do more co-investments, separate accounts, and secondaries,” Meng said.

“So there’s no question about that, we can do better there. But given the size of our fund relative to the market capacity, this low-hanging fruit may not be enough for us now to get to where we need to be.”

CalPERS’s past successes in PE have been driven largely by its access to top-performing GPs, and that approach simply can’t scale up forever, Meng said.

“There are only [a certain] number of top managers,” Meng said. “There’s not that many of them, and they only come to the market fund every three or four years.”

CalPERS’s PE portfolio is already heavily tilted toward the largest managers, with $14.5 billion in combined asset value and unfunded commitments with Blackstone, Carlyle, CVC Capital Partners, Apollo and TPG.

Collectively, those five managers make up about a third of CalPERS’s PE exposure, according to Meketa.

To stand a better chance of meeting its private equity targets — and its overall investment return — CalPERS needs to explore more radical solutions, like the proposed CalPERS-controlled funds, Meng said.

“We need private equity,” Meng said. “We need more of it, and we need it now.”

Meketa has estimated that CalPERS would need to commit $10 billion a year to meet its PE allocation targets. That’s a far cry from the $6 billion that it committed in the last fiscal year.

Co-investments, secondaries and the proposed CalPERS-controlled funds could all contribute to bridging that gap, said Meketa Principal Steve Hartt said.

Co-investments have given CalPERS a 15.3 percent return over the past 10 years, beating all other PE investments. Secondaries and funds of funds have lagged, returning 7.4 percent over the same period.

If CalPERS decides to ramp up its co-investment portfolio, Hartt recommended a more consistent pacing, so the system isn’t creating vintage-year concentration by “putting its foot on and off the gas.”

Meng said CalPERS plans to present more research on co-investments at a future meeting.

Currently, co-investments, direct investments, funds of funds and secondaries make up only 5 percent of CalPERS’s unfunded commitments, while comprising close to one-fifth of the private equity portfolio’s net asset value, according to Meketa.

Action Item: View Meketa’s report from the latest investment committee meeting here