CalSTRS to add new PE category, update benchmarks

  • CalSTRS to add a multi-strategy sub-asset to its PE portfolio, grow it from 1.2 pct to 4 pct
  • System is developing new benchmarks, mulls how to measure “non-traditional” PE
  • Non-traditional PE investments include multi-strategy, special mandates, and longer-term investments

California State Teachers’ Retirement System received approval to move forward with an investment policy that will add a sixth category to its private equity portfolio, while updating benchmarks across the asset class.

CalSTRS’s investment committee discussed the changes at its Sept. 20 meeting and gave investment staff the go-ahead to continue developing the policy so it could be voted on at the November meeting.

Under the current policy, CalSTRS lists five “traditional private equity asset classes: buyout, venture capital, debt-related, longer-term strategies and special mandate. The new policy would move two of those sub-asset classes, longer-term strategies and special mandates, to a separate “non-traditional group that also includes a new sub-category called “multi-strategy.” The new sub-category was created as an asset class last year within CalSTRS’s Innovations Portfolio. CalSTRS staff had previously proposed calling those three sub-asset classes “opportunistic, but it changed the label to “nontraditional for the September meeting.

“Were incorporating a new sub-asset, which is multistrategy, said CalSTRS Director of Private Equity Margot Wirth. “Were pulling that over into the private equity portfolio, and that is 1 percent of our overall assets at this time.

The “Multi-strategy” sub-asset class invests in private equity investments along with other private investments with fixed income, real estate and hedge fund characteristics, according to CalSTRS’ draft private equity policy.

The sub-asset class consists of one investment worth $212 million or 1.2 percent of the private equity portfolio, and it has a long-term allocation target of 4 percent. CalSTRS’s investment committee believes there are attractive investment opportunities in this sub-asset class, according to a memo included with the draft policy.

CalSTRS is still working, with the help of consultants Meketa Investment Group and Pension Consulting Alliance, to develop new and clearer benchmarks for private equity, according to CIO Chris Ailman. Its first attempt at developing new benchmarks led to metrics that werent as clear as they could be, Ailman said. This allowed for multiple interpretations that would all be technically correct and all be slightly different, he said.

The new benchmarks should be ready for review and approval in November, he added.

Non-traditional private equity investments will be a challenge to benchmark, Wirth said, since CalSTRS cant easily rely on industry standard measurements.

“These would tend to be the more innovative and less commonplace within the industry, Wirth said. “The non-traditional ones are more unique and more difficult to measure.

CalSTRS also welcomed a new deputy CIO, Scott Chan, and began preparing for a request for proposals for general investment consultants. CalSTRS’s contracts with Pension Consulting Alliance and Meketa will run through May 31, 2019. CalSTRS plans to issue an RFP in the fall with the aim of getting new three-year or five-year contracts in play by June 1.

Action Item: Read CalSTRS’ draft private equity policy here

Correct: This story was updated to correct the spelling of the last name of CalSTRS deputy CIO Scott Chan.