CalSTRS Plans To Boost Buyouts And Cut VC

Limited partners in private equity have been changing their allocations in the face of a changed and changing market. The latest of the largest private equity LPs to plan a large allocation change is the California State Teachers’ Retirement System (CalSTRS). The retirement system will decide in July on a plan that would see it drop its venture capital allocation in favor of more investment in buyout funds.

The pension system’s Investment Committee will consider recommendations at a July meeting that its target allocation for buyout funds be increased from 60% to 70% and that the target allocation for investment in venture funds be lowered from 25% to 15 percent. The recommendations also seek to lower CalSTRS’ target allocations in debt related funds and equity expansion investment funds. The report cites a faster growing buyouts market and already falling exposure to venture capital.

Additionally, CalSTRS’ staff report is recommending the current allocation of 5.1%, or $6.4 billion out of a total portfolio of $125.2 billion, but up to $10 billion.

The report also recommends raising the limits on delegated areas. For example, the limit of capital invested into new funds would be increased from $100 million to $250 million. The recommendations also call for increased capital for follow on investments-instead of the $400 million or 20% available, the report recommends $500 million be available for follow on investing. The report says the changes are needed to enhance the investment staff’s ability to access top-tier private equity funds.

If the plan were approved, CalSTRS would be following the California Public Employees’ Retirement System (CalPERS), which decided in mid-May to allow investments of up to $800 million in a single top-quartile fund.

Private equity limited partners have been looking to increase their holdings in private equity or structured programs that allow them to build a private equity portfolio in line with the California pensions. In April, New Mexico’s governor signed a law that allows the state’s three pension funds to invest more freely in alternative assets, including private equity. In March, Mississippi’s governor signed into law a bill that allows the $16 billion Public Employees Retirement System of Mississippi to invest in alternative assets. Meanwhile, the New Jersey State Investment Council approved a plan to invest 13% of its $66 billion in assets into alternative investments. The plan would allocate five percent, or about $3.3 billion, of its assets to private equity. The New York State Legislature is considering a plan to liberalize its pension investment laws also, which would clear the way for increased private equity investing.

The potential allocation shift follows news from CalSTRS in January that it had hired INVESCO Private Capital to coordinate an initiative to invest in new and next generation fund managers. The pension in January said it would start with $100 million for the initiative.