As the state’s fiscal year draws to a close, the California Public Employees’ Retirement System (CalPERS) is mapping out an investment strategy to carry it through the next fiscal year. When the pension fund’s investment committee meets in Sacramento today, it will outline a plan that calls for few new commitments to private equity funds and aggressive pruning of its $6.7 billion private equity portfolio.
Like most private equity investors, CalPERS’ portfolio has been dogged by falling returns and, since making those numbers public in March, has come under increased public scrutiny by pensioners watching the value of their retirement funds fall. It’s backing away from making more private equity investments in a negative economic climate and will make the active management of its 350 partnerships a priority for the fiscal year that begins July 1.
CalPERS is not the first public pension fund to make public its concerns over the risk inherent in private equity investing and whether the asset class can sustain double-digit returns. The Colorado Public Employees’ Retirement System (CoPERA) is planning to pull up to $800 million out of the private equity markets, reducing its exposure to the asset class from a current level of $2.7 billion to $1.9 billion over the next several years. The California State Teachers’ Retirement System (CalSTRS), meanwhile, has not made a single new fund commitment since November 2002.
Not only will CalPERS’ private equity staff undertake a comprehensive portfolio review over the next fiscal year, it also plans to develop proactive monitoring tools for early problem identification and resolution and explore new benchmarks. In its report to the fund’s investment committee, CalPERS’ investment staff blamed the tough economy and global instability for the poor performance of its portfolio companies, a situation made worse by dormant public equity markets that do not welcome new issuers and a credit crunch.
As of Dec. 31, 2002, CalPERS’ private equity portfolio had active commitments worth $19.6 billion. Since the program was initiated in 1990, it has generated returns of 9.5 percent.