CalPERS needs to commit $10 bln annually to meet PE targets

  • The $348 bln pension fund committed $5.3 bln to PE in fiscal year 2018
  • CalPERS’s pursuit of co-investments and separately managed accounts has faltered without PE boss
  • CalPERS is considering other ways to boost its PE allocation

California Public Employees’ Retirement System would have to commit $10 billion annually to private equity if it wants to meet its allocation target, a pace that the pension fund will struggle to meet, according to its consultant.

CalPERS is not far off its current 8 percent target to private equity, but it will begin to fall short unless it dramatically ramps up its commitment pacing, according to its private equity consultant, Meketa, which submitted a report on the PE program in advance of CalPERS’s November meeting.

“One of the key challenges faced by the program is to pace its investments in a steady manner and at scale … to maintain the desired allocation to the private equity class,” Meketa wrote.

That target is significantly higher than CalPERS’s recent annual commitments. In the fiscal year that ended June 2018, CalPERS committed $5.3 billion to private equity, and the system plans to allocate $6 billion to the asset class for the 2019 fiscal year. Between 2011 and 2018, CalPERS’s private equity commitments have stayed in the range of $2 billion to $4 billion annually, according to Meketa.

The $10 billion pace wouldn’t be entirely unprecedented for the pension giant. CalPERS committed $14 billion in 2007 and then scaled back sharply as the financial crisis hit, going from $11 billion in 2008 to $1 billion in 2009.

To meet its goals, Meketa found that the pension fund will need to hire staff with additional skills. In particular, Meketa believes CalPERS will need to prioritize the hiring of a permanent private equity chief, a position that has been filled on an interim basis since Real Desrochers left CalPERS in April 2017.

CalPERS’s private equity staffing has remained relatively steady in the past year, moving from 35 to 34 positions, but it is still down meaningfully from June 2016 and has four vacancies in addition to the managing investment director, according to Meketa.

The lack of a permanent person running private equity has likely contributed to CalPERS’s failure to make progress on its stated goals of pursuing more co-investments and separately managed accounts, Meketa found.

Beyond finding a private equity chief, CalPERS will also have to transition its investment office to a new CIO. The retirement fund has selected Yu Ben Meng to replace outgoing CIO Ted Eliopoulos, although it has not announced a start date for Meng.

The $348 billion pension fund has been exploring ways to boost its private equity allocation, including a proposal that would set up a new CalPERS-controlled entity, called CalPERS Direct, to make more direct investments in companies. CalPERS Direct, as proposed, would have one branch called “Innovation,” focusing on late-stage investments in tech, life sciences and health care, and one called “Horizon,” focused on long-term investments in “core economy” established companies. The board has not yet approved the proposal.

Beyond the CalPERS Direct proposal, the pension fund is considering a variety of strategies and investment structures in private equity, according to Meketa.

CalPERS is considering increasing its commitment pace to private equity managers in core large buyouts. The system also is considering creating separate accounts with key private equity partners, ramping up its co-investment and secondary programs, developing a focus on less risky core assets and exploring investments in publicly traded opportunities that provide “private equity-like” exposure.

CalPERS private equity portfolio was valued at $27 billion as of June 2018. By strategy, CalPERS private equity exposure is 64 percent buyouts, 16.6 percent growth and expansion, 9.6 percent credit, 6.9 percent opportunistic, and 2.9 percent venture.

Action Item: Find out more about CalPERS’ private equity portfolio here