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CalPERS makes big PE pivot to co-investments and separate accounts

The $445bn pension's commitments to the lower-fee structures significantly dwarfed its fund commitments in its latest investment report.

California Public Employees’ Retirement System leaned heavily into private equity co-investments and separately managed accounts in the final part of 2020, making good on a pledge to focus more on those structures as it seeks to reboot its $30.8 billion program.

In total, CalPERS committed just under $4.3 billion to private equity between September of last year and the end of January this year, with $3.5 billion of that deployed during the fourth quarter of 2020.

CalPERS committed $900 million to fund investments with TCV‘s eleventh fund and Thoma Bravo‘s fourteenth flagship fund.

CalPERS committed $2 billion to five customized investment accounts, defined on the pension’s website as an investment structure wherein CalPERS is the sole investor.  These are also commonly known as “separately managed accounts.” Managers that Buyouts confirmed through regulatory filings or CalPERS documents included Ardian, AlpInvest Partners and EQT.

In 2019, CalPERS changed its rules for customized accounts to provide itself more options, as Buyouts reported.

The rest of the Q4 capital went to co-investments with Blackstone, Onex, Advent International and Summit Partners, among others.

Two more commitments were noted from January of this year, but it was not clear what their structure was. CalPERS committed another $600 million to a fund called Greenleaf Co-Invest Partners, LP, which is managed by the Carlyle Group, and $25 million to United Physician Management Holdings, LP, a vehicle apparently connected to the recent purchase by Ares Management and Atlas Partners of a women’s health care company. Sister title PE Hub reported on that deal.

Private equity head Greg Ruiz told the investment committee last September that these structures would be the primary way to increase the program’s cost efficiency for now, as Buyouts reported.

Last year, the pension hired Alaska Permanent Fund veteran Yup Kim to work under Ruiz as an investment director. In a LinkedIn post from earlier this month, Kim shared some long-term plans for the program, which included increased co-investments.

“Co-investments offer meaningful flexibility to our long-term partnerships,” Kim wrote. He also said the fund had deployed “significant capital” into co-investments since restarting its program in fiscal year 2020.

Co-investments are increasingly popular among LPs as a way of keeping costs down. CalPERS’s sister system, California State Teachers’ Retirement System, committed slightly more capital to co-investments than traditional funds in the second half of 2020, as Buyouts reported.

What appears to still be on the back-burner for the time being is CalPERS’s ambitious “Pillars III and IV” plan to build two outside-run private equity funds with CalPERS as the sole LP. Since being tentatively approved in 2019, virtually no public information has been released, though in September staff did suggest to Buyouts the plan was still moving forward as part of a larger strategy.

Meanwhile, CalPERS’s private equity performance as of December 31, 2020 was an enormous improvement over the year before, which, as Buyouts reported, saw the pension’s slowest returns in a decade.

Last year, though, the resilient PE market dynamic appeared to buoy CalPERS’s portfolio. As of December 31, but lagged a quarter, the portfolio returned 12.5 percent over one year and 9.2 percent over three years, beating its benchmarks. However, five and 10-year returns were slightly behind their policy benchmarks.

Still, according to a report from consultant Wilshire, the last two quarters of 2020 saw the PE program’s best two-quarter stretch since the 2008 financial crisis.

As of March 12, CalPERS’s total fund was valued at $445.15 billion. The pension declined to comment for this story.

Action Item: see CalPERS’s 2020-21 commitments here, and read the presentations from Wilshire and Meketa Investment Group here and here, respectively.