CalPERS to increase focus on co-investments, venture capital

California Public Employees’ Retirement System is building the future of its private markets investment program with increased focus on coinvesting as a way to lessen the fee burden, and venture capital, which the system has long undervalued.

Citing a “lost decade,” caused by what it considered an underallocation to private equity, the nation’s largest public pension system is embarking on a plan to increase the amount it will allocate to the investment niche, as well as where it will steer this capital.

The two big winners include co-investments and venture capital, which will see a steep increase in its allocation. These details were addressed by Anton Orlich, who heads the $452.6 billion system’s private equity program, at its June 20 investment committee meeting. Buyouts watched a broadcast of the meeting.

According to Orlich, the system made $4 billion in co-investment commitments – or half of its total PE commitments – in the second half of 2022, the highest amount in the system’s history.

Fee reduction is the primary attraction for the system’s interest in co-investments, Orlich told committee members.

“It’s one of the most effective ways to address costs. A lot of cost mitigation efforts come at the expense of net returns. But increasing our commitments to co-investments is where reducing costs goes hand-in-hand with improving net returns,” Orlich said.

Over the past decade, the system’s co-investments have returned 12.1 percent, in line with the results of its overall private equity portfolio, according to a note from adviser Meketa.

CalPERS also plans on increasing the amount of venture capital commitments in its private equity program to 10 percent, Orlich said. This marks a dramatic pivot in the system’s PE strategy.

As of March, only 1.4 percent of the system’s $55 billion private equity portfolio is dedicated to VC investments, according to Meketa.

The increased investments in VC would equate to 1 percent of the pension giant’s total fund, Orlich said.

In his presentation to the investment committee, Orlich cited State Street data that showed venture capital outperformed buyout funds every year from 2010-2019. VC fund performance has been driven by the returns of highest-quartile funds, making access to top-performing VCs a challenging prospect, Orlich said.

“Since these firms are known, maintain performance and are disciplined, they tend to be oversubscribed. It’s as much of an exercise in access as it is manager selection,” Orlich said.

Meketa’s note showed that CalPERS’ venture investments have not fared as well as the rest of its PE portfolio, with a one-year performance of negative 24.8 percent.

The system’s venture capital portfolio has returned 8.6 percent over the past decade, below the private equity portfolio’s overall return of 12.1 percent, according to Meketa.

Orlich said he expects the build-out of the venture program to take at least five years.

In the second half of last year, the system’s VC investments included commitments to four Asia-focused Sequoia Capital funds, Goodwater Fund V and Goodwater Infinity III and BOND III, according to a previous note from Meketa.