CalSTRS co-investments outpace fund investments in last half of 2020

CalSTRS has been growing its co-investment program steadily for several years as part of its system-wide 'Collaborative Model.'

In the second half of 2020, California State Teachers’ Retirement System committed more to private equity co-investments than traditional private equity funds, according to documents posted on the $282.5 billion fund’s website.

“This is the start of our implementation and shift in our portfolio,” chief investment officer Christopher Ailman told Buyouts through a spokeswoman.

All told, CalSTRS committed $4.4 billion to private equity in H2, with $2.22 billion going to direct co-investments or co-investment funds and $2.05 billion to fund investments.

This tally does not include a $125 million commitment to an AlpInvest Partners vehicle called AlpInvest SSMA, which CalSTRS described to Buyouts as a partnership that focused on co-investments of less than $25 million and overflow deals throughout AlpInvest’s platform.

CalSTRS hired AlpInvest as its co-investment adviser in 2018, as Buyouts reported. It also committed to a separate AlpInvest co-investment fund in H2.

In January 2019, CalSTRS announced plans to double its co-investment activity, as Buyouts reported. CalSTRS’s PE co-investments are part of its “Collaborative Model,” a system-wide initiative to bring more investment capacity in-house.

“We’re engaged in a multi-year effort to significantly increase the proportion of capital deployed within direct structures,” a CalSTRS spokeswoman told Buyouts.

Co-investments charge no fees or carry and are increasingly popular as a way to avoid the heavy fees charged by private equity firms in traditional partnerships.

CalSTRS has also begun making opportunistic debt investments as part of its private equity program, which are intended to provide opportunities in stressed and distressed assets.

The commitments include $250 million each to opportunistic debt-related co-investment vehicles run by Apollo Global Management and Sixth Street. CalSTRS also committed $300 million to Apollo’s second hybrid value fund.

Last April, Ailman told Bloomberg TV the fund was considering opportunistic debt investments and previewed the coming shift toward co-investments.

“We will be less interested in traditional partnership structures and more interested in collaborative structures,” he told Buyouts via email.

The co-investment program is small but growing rapidly. As of September 30, 2020, co-investments took up 11 percent of CalSTRS’s total private equity portfolio against 89 percent committed to funds. This was an increase from March 31, when co-investments took up only 7 percent of the PE program against 93 percent in fund commitments.

As of September 30, the private equity portfolio was valued at $28.8 billion with $23 billion in unfunded commitments, for $51.8 billion in total exposure. Private equity took up 11.2 percent of the fund’s portfolio. That was over its 9 percent interim target, but as Buyouts has reported CalSTRS is in the process of steadily raising its PE allocation to 13 percent.

Strong PE performance during covid

Despite the extreme economic disruption last year due to the coronavirus pandemic, CalSTRS’s private equity performance was also impressive, especially over the last year, suggesting the strong mid-year rebound of the public markets had cascaded into the private equity market, where valuations are lagged a quarter.

As of September 30, the portfolio returned 16.3 percent over one year, 12.97 percent over three years, 12.6 percent over five years and 12.45 percent over 10 years, beating its benchmarks in all time periods except 10 years, which lagged one PE index by a quarter of a percentage point.

CalSTRS’s PE co-investments roundly outperformed its fund investments. Co-investments returned 27.1 percent over one year, 19 percent over three years, 18.2 percent over five years and 14.76 percent over 10 years.

Fund investments returned 14.7 percent over one year, 12.23 percent over three years, 12 percent over five years and 12.26 percent over 10 years. Co-investments did lag fund investments in since-inception returns, though, at 10.4 percent to 13.3 percent.

The PE program will be discussed at CalSTRS’s investment committee meeting on Thursday.

Action Item: read Meketa’s presentation on CalSTRS’s private equity program here.