CalPERS sees strong returns from PE co-investments

  • Co-investment/direct investment portfolio delivers five-year 17.6 pct return
  • Proposed outside partner expected to boost co-investment pipeline
  • Overall PE returns hit 12.6 pct over previous five years

Co-investments and direct investments have delivered significantly higher returns than other private equity strategies for California Public Employees’ Retirement System over the past five years, documents released by the system show.

A Meketa Investment Group report included in CalPERS’s Feb. 12 investment-committee meeting materials disclosed co-investments and direct investments, which represented around 8 percent of its PE portfolio, netted a 17.6 percent five-year time-weighted return.

The next best performing strategy within CalPERS’s PE portfolio was traditional fund investments, which were netting 12.8 percent over the period, Meketa found. Funds represented around 80 percent of the retirement system’s $26.7 billion PE program.

Both strategies pushed the CalPERS PE portfolio’s overall return to 12.6 percent.

“Co-Investments/Direct Investments performed very well overall. Due to the concentration of the Co-Investment/Direct Investment portfolio, a small number of substantial investments tend to drive performance,” the report says.

Co-investments in recent years have grown increasingly popular among limited partners, as they enable LPs to exert more control over the composition of their private equity portfolios at a lower cost. The strategy is also viewed as an effective way to reduce external investment costs, albeit at the expense of more work for limited partner investment staff.

CalPERS is considering hiring an outside firm to manage its new PE investments. While the new partner is expected to closely coordinate with the retirement system’s staff, one expectation is that an outside partner could improve CalPERS’s pipeline for potential co-investments as it seeks to deploy as much as $10 billion a year in private equity.

Whether CalPERS moves forward with hiring an external partner remains to be seen, Buyouts reported last week. The system’s investment committee will discuss the proposal in closed session at its Feb. 12 meeting.

Separate reports within CalPERS’s meeting materials also disclosed more than $1 billion of new commitments to PE funds made in the last two months of 2017. The largest single commitment went to Carlyle Group’s latest flagship U.S. buyout fund, which had raised more than $14.3 billion toward its $15 billion target as of Feb. 7, according to an SEC filing. CalPERS committed $600 million to the fund.

The retirement system committed $300 million to Insight Venture Partners X, which is targeting $5 billion, and $75 million to Valor Equity Partners IV, which is targeting $750 million. And CalPERS committed a total of $437.5 million to Bridgepoint Europe VI and a co-investment, which were disclosed as a single commitment made in December.

Action Item: Read the Meketa report:

CalPERS headquarters in Sacramento, California, on Oct. 21, 2009. REUTERS/Max Whittaker