CalPERS weighs folding PE into larger public equity portfolio

  • New portfolio would combine PE, global equity
  • Proposal gives CalPERS greater flexibility on portfolio construction
  • CalPERS PE in transition period after Desrochers, PCA exit

The largest U.S. public pension is considering a proposal to fold its private equity program into its global equity holdings, a much larger portfolio.

California Public Employees’ Retirement System would continue to invest in PE as part of its overall allocation to what staff called “growth” holdings, a presentation made at the system’s April 17 investment committee meeting shows. The proposal would also change how its private equity portfolio’s performance is measured, as well as the level of interaction between its PE staff and global equity staff.

“We want to have some more flexibility in the asset-allocation decisions,” CIO Ted Eliopoulos said at the meeting. “We are coming with some ideas, during our discussions and hopefully the discussions here today, [that] will show that we are … really trying to look deeply into how we organize ourselves and our assets.”

CalPERS’s investment panel did not vote to make any changes to its asset allocation or structure at the meeting. Specifics of the proposal have yet to be finalized and staff will continue to consult with the committee over the next several months, Eliopoulos and CalPERS Managing Director Eric Baggesen said at the meeting.

The proposal to reshuffle asset allocations and structure is rooted in an effort to improve communication and teamwork among the investment staff, particularly between those who work on different parts of the portfolio, Eliopoulos told the committee.

“This is actually trying to change the culture of the investment office, and that is certainly going to be an element when we get into the private equity recommendations,” he said.

Folding PE into a larger portfolio with global equities could help CalPERS manage its exposure to certain sectors, staff said at the meeting. CalPERS has little say in how private equity fund managers invest committed capital, which creates situations where the pension system’s overall portfolio becomes over- or underexposed to certain geographies or sectors, staff said.

Combining private equity and public equity into a single allocation enables CalPERS to better monitor those exposures, staff said. For instance, if PE managers built up large stakes in energy-related assets, staff could sell some of its holdings in public shares of energy companies to compensate.

Such a change would enable CalPERS to tailor its portfolio to its market outlook, rather than those of its fund managers, board member Priya Mathur said at the meeting.

The proposal has other practical applications beyond portfolio management, according to Eliopoulos and Baggesen, who oversees asset allocation and risk management for the pension system.

CalPERS has no say as to when its private equity managers will call committed capital, which makes it difficult to maintain a steady allocation to the asset class. Analysis presented by Baggesen demonstrated that CalPERS spent the better part of the past 26 years below its target allocation for PE. This pressures staff to commit additional capital to new funds, even if the market is unfavorable.

“I’m personally loathe to have a team setting up a set of targets that we actually cannot manage the exposure to. What is the point of the target if you cannot manage arriving at that destination in some rational fashion?” Baggesen said.

Furthermore, sliding private equity into a larger growth portfolio with public-market holdings could standardize benchmarks across both asset classes, Eliopoulos told the board. Under the new scheme, CalPERS’s private equity portfolio would be measured against the same benchmark as global equity, the FTSE All World, All Capitalization index. The program’s PE component would also be expected to generate a premium over the public-market index return, though that has yet to be determined.

Eliopoulos acknowledged that CalPERS has struggled to meet its private equity benchmarks. The retirement system has rotated through several benchmarks over the years.

“In that regard, I can only say we’ve used many,” he said. “You can always build a better mousetrap, and that’s why I come to this with some humility.”

Reaction to the proposal among CalPERS investment committee members who spoke at the meeting was mixed. Some, including JJ Jelincic and Richard Costigan, said they were concerned with merging asset classes with different approaches to fee transparency, as well as varied return and liquidity characteristics. Others, like Ron LindBill Slaton and California State Controller Betty Yee, indicated they were supportive of a change.

CalPERS’s PE program underwent several significant changes in recent months. Its private equity chief, Réal Desrochers, left for a position at a large overseas bank earlier this month. Portfolio consultant PCA resigned from its contract with the pension system in March, though it will continue to advise on real estate and CalPERS’s total portfolio.

Last week, the Wall Street Journal reported the $317.4 billion retirement system was considering changes to reduce costs and further eliminate its roster of fund managers, including purchasing a private equity firm and pursuing more direct investments in private companies.

Action Item: To read up on the CalPERS proposal, visit