CalSTRS projects huge cash windfall from PE portfolio

California State Teachers’ Retirement System believes its private equity portfolio will generate between $10 billion and $20 billion in positive cashflow over the next five years.

The nation’s second-largest public pension system’s rosy picture runs counter to that of many of its peers, which suffer from negative cashflows stemming from their private equity portfolios.

The system discussed its private equity pacing and considerations related to its leverage policy at its January 11 investment committee meeting. Buyouts viewed a broadcast of this meeting.

Modeling conducted by investment staff said the system’s $50 billion private equity portfolio will deliver the system between $10 billion and $20 billion more in distributions than contributions over the next five years, according to a memo included in board documents.

The positive cashflow also comes after the system hiked its private equity target in recent years from 8 percent to 14 percent. As of November 2023, 16.1 percent of the system’s $317 billion portfolio was allocated to private equity, according to board documents.

“This is a milestone for you to achieve considering those changes,” said John Haggerty, managing principal director of private investments for consultant Meketa.

CalSTRS staff based its projections on historic data from its private equity portfolio.

According to the memo, CalSTRS averaged 1.8x in returns from its contributed capital on average from 1988 to 2015.

Net IRR returns averaged 16.8 percent for 34 years through 2021, with none losing capital, according to the memo.

“We can make pretty good estimates where our cashflow will be over the long-run,” said Margo Wirth, CalSTRS director of private equity, at the meeting.

CalSTRS’ situation is unusual compared with other public systems, as the slowed exit environment has reduced distributions to LPs over the past year.

“There’s a low level of activity in private equity today, and the distributions you should expect to come back have slowed. Despite that, we still have the expectation that you’ll be getting more money back than you’re going to put into your portfolio,” Haggerty said.

CalSTRS’ investment committee also approved a plan allowing the system to leverage up to 10 percent of its total fund to smooth out liquidity concerns possibly caused by private funds, even with the private equity portfolio’s projected windfall.

“It’s a tool we can use particularly during market disruptions. We may need flexibility to rebalance, especially if we have some cashflow issues,” said Scott Chan, CalSTRS’ deputy chief investment officer.