CalSTRS revamps PE portfolio, eyes direct-investing strategies

  • Assets under management: $223.8 bln
  • PE allocation: $18.2 bln / 8.1 pct
  • Co-investment portfolio: $1.3 bln
  • Number of external PE managers: 122
  • Why this is important: LPs are exploring new strategies for their private equity portfolios.

California State Teachers’ Retirement System at its recent July board meeting presented a reorganization of its PE portfolio and added a new sub-asset class.

The restructuring is meant to make room for opportunistic, long-term strategies, Margot Wirth, director of private equity for CalSTRS, said at the meeting.

The PE portfolio will be divided into traditional and opportunistic groups.

Partnership-based buyouts, venture and debt-related assets would be housed under the traditional group and be reviewed against peer benchmarks.

Opportunistic, representing direct and co-investments, include longer-term strategies, special mandates and multistrategy, a new sub-asset class. Since this group does not represent mainstream PE strategies, its asset classes would be reviewed against proxy benchmarks, pension documents said.

While the traditional group comprised more than 90 percent of the private equity portfolio, CalSTRS expects the opportunistic segment to gain significantly in coming years, Wirth said.

Opportunistic investing is more deal- and transaction-based than traditional PE investing; thus staff recruiting and training will focus on analytics, Wirth said.

Longer-term strategies, earlier known as core private equity strategy, includes new investment products that will be held longer and will carry lower management fees and carried-interest percentages, pension documents said.

Special mandates include innovative strategies in which CalSTRS invests with fund-of-funds managers. The system is seeking to nearly double co-investments or side-by-side commitments in this asset class to $100 million from $55 million.

Multistrategy will invest in PE along with other private investments with fixed-income, real estate, and hedge-fund characteristics. It currently consists of one investment worth $212 million and was incubated in the CalSTRS innovations portfolio.

The approved long-term target for buyouts within the PE program was increased to 69 percent from 66 percent, venture remained at 7 percent and debt-related assets were reduced to 11 percent from 15 percent.

Multistrategy was allocated 4 percent, longer-term strategies 5 percent and special mandates 4 percent of the private equity portfolio.

CalSTRS’s $18.2 billion PE portfolio includes buyouts, venture, debt, special mandates, core PE and opportunistic strategies. Buyouts is the largest asset class at $12.5 billion, according to documents.

CalSTRS’s private equity portfolio has 122 external managers. Its largest PE relationships are with Blackstone, TPG Capital, New Enterprise Associates, Carlyle, Permira, EnCap, Centerbridge, Thoma Bravo, Bain Capital and HarbourVest Partners, as of Dec. 31, 2017, pension documents said.

At the meeting, CalSTRS also extended the PE consultant contract for Meketa Investment Group for two years.

CalSTRS reported a net return of 8.96 percent on investments for the fiscal year ended in June.

Action Item: Read more on the CalSTRS investment policy here