CalPERS also to take the first steps toward snapping up distressed debt as slumping markets create some real bargains
The California Public Employees’ Retirement System made headlines last week when it announced that it may boost its private equity allocation from 10% to 14 percent. A vote is scheduled for the pension fund’s board meeting this week.
Consulting firm Wilshire Associates had recommended a 15% allocation to private equity, but the fund’s investment officers ultimately trimmed that target, according to a memo to CalPERS investment committee.
At first glance, the move would seem to be a giant vote of confidence in the venture and buyouts communities. But any enthusiasm is tempered when one realizes that CalPERS is already at 13% exposure to the asset class.
Sources close to the state pension fund say that the allocation increase would address the realities of its current exposure, but there also is a desire to “juice returns during the upcoming recovery,” says one source.
An improving economy would lift most asset classes. Thus, the added private equity exposure reflects CalPERS’ view that private equity would outperform many other types of investments, a source says.
The board of the largest state public pension fund nationwide, which manages some $169 billion in assets, is also scheduled to discuss at its next meeting whether to create an “opportunistic strategy” fund that would snap up assets knocked down by the credit crisis.
If a subcommittee approves a policy for distressed investing next week, CalPERS’ full investment committee could vote on the new investment program on Aug. 17.
“This is a great time to make some good deals,” says CalPERS spokesman Clark McKinley. “When markets are down, it’s a good time to buy.”
CalPERS decision to possibly raise its asset allocation comes as some LPs are selling their interests in private equity funds on the secondaries market to bring their allocations to the asset class down to target levels. Many pension funds have seen their target levels pushed out of whack as other asset types, such as publicly trade stocks, have fallen in value. The phenomenon, known as the denominator effect, dictates that the size of an investor’s target for private equity funds must fall when the overall size of the portfolio declines.
McKinley says that CalPERS currently has $22.8 billion invested in private equity and venture capital investments. He says that private equity and VC investments could range from 9% to 19% of the total fund under the new plan.
At the high end of that range, CalPERS at current levels could invest more than $27 billion in buyout and venture funds, a boost of more than $4 billion.
CalPERS declined to comment further on its new targets.
The state pension fund is one of the most influential U.S. money managers, and its views on asset allocation, corporate governance and other matters often are copied by other states and heeded by corporations.
Now as corporate defaults soar and banks scramble to shed illiquid assets, CalPERS is mulling a plan for setting aside as much as 3% of total funds for distressed debt. That includes toxic securities and loans held by banks, mortgage-backed securities and bonds issued under the U.S. Term Asset-backed Securities Lending Facility, or TALF.
The distressed asset portfolio was discussed during a CalPERS investment committee workshop last month, according to a memo. A CalPERS subcommittee on June 15 is scheduled to discuss whether to adopt a policy paving the way for the new activity.
Funding for the distressed strategy may come at the expense of CalPERS’ stocks, debt or inflation-linked portfolios, according to a presentation to CalPERS.
CalPERS sets its investment targets for stocks, debt and other assets every three years, and the current allocation plan expires in December 2010. CalPERS said it will do “a more thorough” asset allocation assessment next fall before setting targets for the next three years.