CalPERS PE returns hurt by energy, macro factors

The  performance of California Public Employees’ Retirement System’s $27.3 billion private equity portfolio is starting to dip below long-term expectations, a Pension Consulting Alliance report published in the public pension’s August meeting materials showed.

The PE program returned 10.2 percent on a 10-year annualized basis, 2.5 percentage points short of its custom benchmark, the report said. The portfolio’s three-year and five-year returns also underperformed the benchmark, a blended FTSE public market index plus three percentage points.

“Despite generating positive returns overall, the breadth of the decline in performance relative to the prior reporting period … indicates macroeconomic factors were the primary contributors, including the struggling energy sector,” the report said.

Projected returns from energy funds declined as oil and gas prices fell to post-recession lows, damaging portfolio-company valuations. Credit-related strategies and large venture capital funds in CalPERS’s portfolio have also underperformed, PCA wrote.

The portfolio performed better against its short-term benchmark despite losing ground in the second half of the fiscal year. CalPERS PE delivered a 1.7 percent return in 2015-2016, a 2.5-percentage-point improvement over the negative 0.8 percent notched by its benchmark.

“The 1-year return of 1.7 percent, down from 5.5 percent, as of December 31, 2015, is generally reflective of broader market movements,” PCA wrote, noting that State Street’s index of PE fund returns showed similar declines.

CalPERS’s private equity portfolio returns have slowed considerably over the past two years, consultant Wilshire Associates wrote in an August report. “While still in positive territory, this level of performance was considered soft in relative terms,” according to the report.

Co-investments lose steam

While traditional fund investments represent the single largest component (73 percent) of CalPERS’s PE portfolio, and therefore hold the greatest sway over overall returns, unique low-cost investment products like co-investments and customized accounts now account for 14 percent of the program’s net asset value.

Returns from co-investments and direct stakes in private equity portfolio companies “lagged the overall portfolio over all time periods,” PCA wrote in its report (see CalPERS Private Equity Program). Those deals, which represent around $1.6 billion of assets, returned a negative 4.4 percent in the 2015-2016 fiscal year.

Customized separate accounts, meanwhile, performed well for CalPERS over the one- and three-year periods, according to PCA. Separate accounts returned a 12.9 percent one-year return and a 14.2 percent three-year return.