CalPERS: Shift away from buyouts to growth could mean less reputational risk

California Public Employees’ Retirement System has tilted its private equity portfolio towards growth equity/venture capital at the expense of buyouts funds, which could reduce risks to the reputation of the nation’s biggest pension.

The investment committee approved significant hikes to its private equity and private debt target allocations at its March 18 meeting – along with a discussion about the system’s desire to commit 60 percent of its private equity portfolio to buyouts managers, versus 40 percent to growth/venture funds, down from an 80/20 split just two years ago.

The strategy changes will shift “the proportion of the portfolio away from buyouts, which tend to disproportionately have headline risk to CalPERS, and moving it toward growth and venture, which is based on creating opportunity and adding value through growth – not cost cutting,” said Anton Orlich, who heads the system’s private equity program.

Investment committee member Lisa Middleton pressed investment staff on details about how to balance the increased target to private funds with the potential reputational risk that comes from managers and their portfolio companies.

“Every time we make a direct investment in private equity, there is a frictional cost associated with it in terms of the management and our direct reputational exposure to these investments,” Middleton said.

An example of potential headline risks came during the public comment period made at the start of the investment committee meeting made by several members of UNITE Here Local 11, which represents hospitality workers. The union is involved in a labor dispute with hotel operator Aimbridge Hospitality, which is owned by Advent International.

CalPERS has committed nearly $2.5 billion to Advent International funds over the years, the last being a $650 commitment to Advent International GPE X in 2022, according to Buyouts’ database.

UNITE members testified at the investment committee meeting about sexual harassment and hostile work environments alleged to have occurred at Aimbridge-operated hotels.

CalPERS’ board in late 2023 approved changes to labor principles connected to its sustainable investment guidelines, which highlights the rights of workers to participate in collective bargaining.

“The board adopted stringent new labor principles last year and we will rely on them in our engagement with companies to do the right thing,” CalPERS board president Theresa Taylor said in a press release after the March 18 investment committee meeting.

Peter Cashion, the head of the system’s sustainable investing team, said in 2023 that CalPERS was communicating its concerns regarding labor practices to Advent International.

However, it’s not clear what CalPERS will do if one of its investment managers continues to violate the system’s labor principles, according to Jordan Fein, UNITE Here Local 11’s lead research analyst.

“What can pensions do to not tolerate these kinds of human capital risks? It’s an ongoing question for pensions,” Fein told Buyouts.

UNITE members have also been active at recent meetings of two Los Angeles pension plans, who recently stated an LPA prevented them from addressing specific questions to Advent International when asked to do so by city council members.

Update: The headline was updated to better reflect CalPERS’ shift into growth/venture.