The California State Teachers’ Retirement System (CalSTRS) has begun to explore private equity investment in regions where it has never gone before-Asia, Eastern Europe and Latin America.
If the pension fund adopts a plan that was proposed by consultants McKinsey & Co., its $5.2 billion private equity program could span the globe.
The nation’s third largest pension fund currently limits international investments to Canada, the United Kingdom and Western Europe. The investment committee will likely vote to approve the plan at its meeting this month, says CalSTRS spokeswoman Kirsten Macintyre.
But McKinsey, which encouraged the pension fund to make the move, also warned that exploring new markets is a risky proposition.
“Challenges arise from higher inherent risks and economic volatility in many of these markets,” McKinsey & Co. wrote to the CalSTRS board.
The McKinsey report goes on to warn that investing internationally poses greater difficulties in exiting investments. And there is limited data on performance, perceived mixed or weaker historical returns, and a smaller universe of potential partners with whom to invest.
In 2002, teams managing private equity funds outside North America and Western Europe raised $3.2 billion, or 4% of the worldwide total.
If CalSTRS’ investment committee adopts the new plan, up to one-fourth of its PE portfolio could be invested abroad, though the majority of that would remain in Canada, the United Kingdom and Continental Europe. CalSTRS’ private equity portfolio already includes $1.8 billion of international commitments.
CalSTRS isn’t the only huge pension plan to invest overseas. In March 2003, the New York State Common Retirement Fund committed $200 million to private equity investing in Israel.