CalPERS staff eyes $10 bln per year in PE commitments to keep pace

Managers “returned substantially more cash (largely from exited investments) than they called for new investments.”

California Public Employees’ Retirement System staff is considering hiking the pace of its private equity commitments in coming years, according to a report presented to the pension’s investment committee on Monday, and is considering several options for how to do that.

Staff committed $6.7 billion to 17 funds and one separate managed account in FY19, according to a report from private equity consultant Meketa Investment Group, the most since 2008.

But even with that hike, the program shrank to $26.5 billion as of June 30, 2019 from $27.2 billion a year before, a 3 percent decrease.

Meketa said this was because managers “returned substantially more cash (largely from exited investments) than they called for new investments.”

That left private equity making up 7.1 percent of the $387.81 billion pension, against an 8 percent target. The system is considering several ways to grow the program. This could involve more co-investments, expanding its manager roster and continuing to develop the “four pillars” strategy, which includes developing two CalPERS-controlled investment funds.

CalPERS declined to comment. Meketa has reported this number before, as Buyouts reported.

Fiscal Year 2018-2019 Returns

Meketa suggested CalPERS staff may seek to find new managers to provide greater portfolio diversification. For the last several years, CalPERS limited its PE partners to a “Core 30” of trusted managers, a tactic whose effectiveness Meketa questioned in the past.

An analysis of the pension’s private equity program showed venture was the pension’s best-performing sub-asset class in the short-term, although buyouts pulled ahead in the long-term.

The report split the pension’s $26.5 billion private equity portfolio into five sub-asset classes: venture, opportunistic, buyouts, credit and growth/expansion. Buyouts was by far the largest piece, valued at $18 billion as of June 30, while venture was the smallest, at just $550 million. Growth/expansion was valued at $3.7 billion, opportunistic at $2.1 billion and credit at $1.9 billion.

The overall program had a FY 2019 net return of 7.7 percent, as Buyouts reported. But the Meketa report also provided longer-term private equity returns: 12.5 percent over three years, 9.6 percent over five years and 14 percent over 10 years. All of these longer-term returns were under their benchmarks.

Venture had by far the best short-term returns, at 16.9 percent for the year ending June 30. But its long-term returns were paltry—3.8 percent over three years, 3.2 percent over five years and 6.7 percent over 10 years.

Buyouts, by contrast, started slow and improved with time. Its one-year returns were only 8.2 percent, but its long-term returns shot past venture: 14.2 percent over three years, 11 percent over five years and 14.3 percent over 10 years. All of these were above the overall program and its benchmarks, except 10-year returns, which lagged the benchmark.

The other sub-asset classes had mixed results, sometimes out-performing the program and its benchmarks and sometimes not.

Venture and scale

Chief Investment Officer Yu (Ben) Meng said CalPERS wants to do more venture investing, despite lackluster past performance.

“We are trying to find ways to…get venture capital investment back in our portfolio,” he said. “But [due to] the fact we have been out of venture for so long, there is some catching up we need to do.”

CalPERS staff told the board CalPERS limited its venture investments over the years due to the difficulties of investing at scale plus some bad outcomes to previous investments.

Ruiz’s presentation said that overall, private equity outperformed all the pension’s other asset classes over the three, five, 10 and 20-year time horizons, and trails only global fixed income on the one-year horizon.

“I believe the core of our private equity program is stable and healthy,” he said.

Action Item: Read Meketa’s full report here and Ruiz’s presentation here.