CalSTRS plans to double PE co-investment, boost staffing

California State Teachers’ Retirement System plans to double its co-investment pace over the next two to five years, and to meet that goal, it wants to boost its PE staff up to 65 percent.

The $215 billion system plans to discuss its PE strategy next week. Reports prepared for that meeting shed new light on CalSTRS’s co-investment plans.

CalSTRS is exploring more direct-investing strategies. And it sees co-investments as providing the best near-term opportunities to reduce fees, improve the skills of its in-house staff and lay the groundwork for other direct-investing approaches.

CalSTRS has committed $500 million to $600 million a year to co-investments over the past two years, accounting for about 8.5 percent of its annual $6 billion to $7 billion commitment to the asset class, a report by PE Director Margot Wirth shows.

Increasing that percentage is a major focus of CalSTRS’s PE strategy. The system plans to at least double the scale of the co-investment program by increasing both the number and average size of co-investments each year.

“While there are several other types of non-partnership direct investing strategies that private equity does and can envision expanding, in the opinion of staff, increasing co-invest represents the most immediate, largest and greatest opportunity to reduce costs and increase investment returns,” Wirth wrote.

To boost co-investment, CalSTRS said it would have to hire more staff and increase the portion of its staff with operational expertise.

CalSTRS has 23 investment professionals working on PE, with 18 focused on partnerships and five on direct investing, mostly co-investments.

Wirth’s report proposes raising CalSTRS’s overall PE staff to 38, with 21 focused on partnerships and 17 on direct investment and co-investment.

The costs of hiring and developing in-house co-investment expertise are “[minuscule] compared to the likely rewards,” Wirth wrote.

Both the partnership staff and direct investing staff are divided between investment selection specialists and operations specialists. The increased focus on co-investment will also require CalSTRS to shift a higher proportion of staff to operations.

CalSTRS has four investment staffers, mostly at the leadership level, who are able to lead co-investment deals. Those four spend 30 to 50 percent of their time working on co-investments.

CalSTRS is considering headquartering additional co-investment staff in the San Francisco area. Ready access to GPs there might speed decision-making without running up against restrictive travel policies, Wirth’s report says.

Action Item: View the agenda for CalSTRS’s January meeting here: https://bit.ly/2cm0I6X