CalSTRS to Overhaul Portfolio, Up PE Stakes

Limited partner: California State Teachers’ Retirement System (CalSTRS)

Proposed changes: asset allocation, portfolio liquidation, portfolio rebalancing

Assets under management: $147 billion

Private equity assets under management: $8.3 billion

The California State Teachers’ Retirement System (CalSTRS) has launched a search for investment managers to help it reach the 9 percent target allocation to alternative investments that it raised from 6 percent in September. Taking a page from the playbook of nearby CalPERS, the pension fund appears to be contemplating the sale of portions of its old portfolio on the secondary market.

CalSTRS, the second-largest public pension in the United States, with $147 billion in assets under management, is asking potential investment managers to submit proposals by November 14. The managers would be responsible for restructuring CalSTRS investment program through changes in asset allocation, portfolio liquidation and portfolio rebalancing.

Details of what CalSTRS plans do are not yet decided. But the move promises to be a significant one for the pension system, involving several asset classes, several managers and mandates across various capitalization ranges, styles and regions, according to the pension system. “We are at the inception of an unprecedented change in our portfolio,” CalSTRS Chief Investment Officer Christopher Ailman said in a prepared statement. “These managers will be instrumental in our long-term asset allocation strategy to shift assets from fixed income to more aggressive blended investments that fall somewhere between our private equity and real estate asset classes.”

CalSTRS has been one of the private equity market’s stalwart institutional investors. The giant pension fund is a limited partner in buyout funds managed by Apollo Management, Bain Capital, Blackstone Group, The Carlyle Group, Clayton DubIlier & Rice, First Reserve, Kohlberg Kravis Roberts & Co., Texas Pacific Group as well as a number of venture capital, secondary and other private equity funds.

In September, CalSTRS adopted new allocation targets for its portfolio to achieve a higher-risk, higher-return asset mix. It raised its target for alternative investments from 6% to 9 percent, while raising the target allocation on its real estate portfolio, which it treats separately from alternative assets, from 6% to 11 percent. The plans for reaching these asset allocations are under development, but the pension fund anticipates that it may take up to six years to achieve.

CalSTRS did not return calls for comment. The Pension Consulting Alliance serves as the pension system’s general consultant for portfolio investment oversight.

Meantime, CalPERS, the largest public pension in the United States, is undergoing a similar restructuring, with plans to reduce the number of private equity relationships it manages and to change its management structure by using more outside managers. As part of the plan, the $200 billion pension system is considering a sell-off of private equity partnerships to the tune of about $3 billion–$2 billion in partnership interests, and $1 billion in unfunded commitments (see Buyouts, Apr. 17, 2006). At the end of March, CalPERS also issued two requests for information (RFI) as part of a strategic review likely to see the pension system reduce its directly held private equity fund investments significantly. — M.S.