Costs fall at CalPERS as PE portfolio matures

The California Public Employees’ Retirement System’s private equity management fee costs amount to only two-thirds of what they were in 2010, according to retirement system documents.

In 2010, when CalPERS valued its private equity portfolio at $28.7 billion, management fees ate up more than 2 percent of the program’s assets under management. Over the next four years, as the portfolio grew to $31.5 billion, management fees fell to just 1.4 percent of AUM, according to a report included with the retirement system’s April investment committee meeting materials.

“Both the aging of the portfolio and staff’s focus on negotiating lower fees contributed to the reduction over the last four years,” CalPERS spokesman Joe DeAnda said in an email. The April report also indicates CalPERS secured better economics with its external private equity managers and shifted assets to lower-cost strategies.

Like many LPs, CalPERS rapidly expanded the size and scope of its private equity program in the years leading up to the global financial crisis, allocating more than $33 billion to private equity between 2006 and 2008. As CalPERS’ massive stakes in 2006-2008 funds matured, the fees the retirement system paid for those funds declined, thus bringing down the cost of its portfolio.

CalPERS also became much more discerning with its commitment pace in the years after the crisis, allocating just $13.2 billion to the asset class between 2009 and mid-2014 (roughly 40 percent of what it committed between 2006 and 2008). The post-crisis period coincided with an effort on the part of its investment staff to reduce management fees and improve fund terms, including the implementation of separate accounts, according to retirement system documents.

Leveraging size

Managers frequently offer discounts on fees in exchange for larger commitments to separate accounts and, with $306 billion of assets, CalPERS benefits from its size. CalPERS adopted the strategy in the early part of the decade, most notably with its investment in Blackstone Group’s tactical opportunities funds.

CalPERS has committed $900 million to separate accounts and co-investments with Blackstone’s broadly mandated separate account business since 2012. Although the retirement system does not disclose fund terms on individual commitments, similar Blackstone accounts with other public pensions, such as the Oregon Public Employees Retirement Fund and New Jersey Division of Investment, featured better-than-market terms.

Another cost-saving measure was the implementation of a co-investment program, which LPs typically pursue on a no-fee, no-carry basis. As of June 30, CalPERS had invested about $1.3 billion of its private equity portfolio into direct investements and co-investments. It recently disclosed another $210 million of commitments to co-investments with Blackstone and Onex Partners.

While DeAnda said that the retirement system does not break out the costs associated with its co-investment program, retirement system documents indicate staff considers co-investing a tool to reduce costs.

More of the same

Even with the reduced costs, the retirement system’s 10.1 percent allocation to private equity still accounted for $441 million in management fees last year, which constituted more than half of the $798 million it paid in fees overall, according to retirement system documents.

The retirement system will continue to emphasize separate accounts and co-investments as a means of reducing the cost of the private equity portfolio, Senior Investment Officer Réal Desrochers said in a December recording of CalPERS’ investment committee meeting.

“This is what we’ll be doing next year, working on customized investment accounts, co-investment … [making sure] it delivers what it says it’s supposed to do,” Desrochers said.

The retirement system is also trying to sell about $1 billion of its portfolio on the secondary market, Buyouts previously reported, citing sources familiar with the plan. CalPERS CIO Ted Eliopoulos previously told the Financial Times he wanted to cut the number of private equity managers within the portfolio by around two-thirds, to about 120 or 100.

DeAnda said he was “unable to say” how secondaries sales have improved costs.