CalPERS plays down ambitious plan to become direct PE investor

  • Why this is important: CalPERS won’t pursue more extreme outsourcing or in-house investing scenarios that have been under consideration
  • AUM: $350 bln

California Public Employees’ Retirement System clarified goals for a revamp of its private equity investing, saying its proposed “direct” investment vehicles will work exactly like a “tried and true” separately managed account.

CalPERS has been grappling with how to keep its PE allocation near its 10 percent target, which would require a commitment pace of $10 billion a year, according to a recent review by its PE consultant.

As part of an ongoing review of its private equity business model, the $350 billion pension plan has proposed a four-pillar structure that focuses on PE partnerships, emerging managers, a long-duration fund for health and technology investments, and a long-duration fund for large “core economy” businesses.

For the new focus on long-term investments, CalPERS has proposed to set up an independent entity, CalPERS Direct, which would have a separate board and two funds called Innovation and Horizon.

CalPERS CIO Ted Eliopoulos said Tuesday the two new funds would work like a separately managed account, with CalPERS as the sole limited partner.

Eliopoulos said that CalPERS staff would not be making direct investments and that CalPERS would not own the new CalPERS Direct entity.

The partnership structure would take advantage of “what’s old and tried and true for CalPERS,” Eliopoulos said.

“What we really settled on is that the traditional partnership structure, where you have a general partner and a limited partner, is really the structure that we think is best suited to pursue pillars three and four into the future,” Eliopoulos said.

For the new CalPERS Direct funds, which the board has not yet approved, the retirement fund will still be entering new territory by focusing on longer-term investments than a traditional commingled PE fund, Eliopoulos said.

“They allow us to create a partnership where we can set an evergreen or indefinite investment horizon, which more closely resembles the long-term horizon of CalPERS,” Eliopoulos said.

The Innovation and Horizon funds would also be structured to increase manager alignment, perhaps by setting a budget rather than paying fees based on assets under management.

They also would give CalPERS more control over the types of investments that the funds make and hold, Eliopoulos said.

For the partnership pillar, CalPERS had considered outsourcing a large chunk of its private equity portfolio through a strategic partnership, and had solicited proposals from a select group of firms.

Investment Officer John Cole said those discussions were driven by CalPERS’s desire for better negotiation leverage and for more control over the investments made and the governance employed.

“We’ve learned a lot here,” Cole said. “A year ago we thought maybe it would be best to find the large partner in a discretionary role to help us identify good funds and to expand our relationships to include more co-investing and access to secondary transactions … but we have come to the realization after a lot of analysis and discussion that the structure is unlikely to meaningfully strengthen our position.”

Action Item: Check up on CalPERS private equity discussion here:

Clarification: The article headline and paragraphs one, five and six were reworded to better reflect the relationship between CalPERS and the new CalPERS Direct funds.