CalSTRS plans to hike private equity allocation

California State Teachers’ Retirement System plans to increase its private equity allocation by about 3.6 percent, according to documents posted on its website ahead of its January 30-31 meeting.

The change comes on the heels of a quadrennial asset liability management study, the results of which the investment committee approved in November. CalSTRS will also be significantly dropping its public equities allocation.

The new long-term target for the private equity program is 13 percent. The change in allocation will happen in one percent increments, or “steps.” The target is nine percent, and it will go up to 10, 11, 12 and finally 13 percent.

As of December, 2019, the CalSTRS private equity portfolio made up 9.33 percent of its portfolio, according to its website. The portfolio was valued at $23.7 billion. CalSTRS’s full fund was valued at $254 billion. Its return assumption for the overall fund is 7 percent.

There is no clear timeline for how the changes will happen.

“CalSTRS has learned from experience that setting a rigid timeline is inefficient as investment opportunities ebb and flow and do not follow a calendar time frame,” staff said in the document. “If investment opportunities present themselves then staff will move quicker…if a steady allocation is more prudent, such as the allocation to private equity, where time diversification is critical, then an opportunity-based approach is more appropriate.”

The meeting document suggested the policy targets could be shifted at “quarter end” if staff and its consultant, Meketa Investment Group, agreed it was appropriate to recommend it.

The new allocation was not deeply discussed during the Jan. 30 meeting’s open session. Board member Gayle Miller did express concerns about how the shift in private equity allocation will happen.

“I still think that the implementation and where we are and how we’re going to get there is an important question, and the thoughtfulness not only in terms of the sequencing it over a period of time…but also how you’re going to build capacity,” Miller said at the meeting. “I’ve been especially concerned around the issues of that very question in private equity, not only how we’ll get to 13 percent, how we’ll build capacity and how we’ll do that while working within the collaborative model and hopefully bringing it in-house for partnerships and co-investments.”

CalSTRS declined to comment further on Miller’s comments or to make her available. Miller also did not respond to a LinkedIn message requesting comment.

The “collaborative model” is an ongoing effort to shift more investment capabilities inside CalSTRS overall. On the private equity side, the main focus of that is on co-investments, deputy CIO Scott Chan told the board in May.

Chan also told the board that co-investments were 7.5 percent of the private equity portfolio and the goal was to move that to 15 percent. He also said CalSTRS would seek to hire more people into its private equity program, as Buyouts reported, and wanted to find ways to negotiate better terms with its private equity partners.

New private equity consultant

Chief Investment Officer Christopher Ailman also told the board that CalSTRS would begin its search for its next private equity consultant, as its contract with Meketa Investment Group expires at the end of September.

Ailman said CalSTRS planned to send out a request for proposals, and asked board members to provide input about how they would like the request to be structured. He said he did not expect many bids, as CalSTRS does not give its private equity consultant discretion. He also said that should CalSTRS choose to change consultants, Meketa’s contract may need to be extended until December so that there would be an overlap.

Action Item: read the agenda item from the January 30 CalSTRS investment committee meeting here.