- “There’s an incredible amount of capital” chasing PE, says Eliopoulos
- CalPERS hasn’t disclosed new commitment to PE since December
- PE Portfolio valued at more than $25 bln
California Public Employees’ Retirement System has been reaching out to its private equity managers over the past six months as it reviews the portfolio for a possible overhaul, CIO Ted Eliopoulos told Buyouts in an interview on Wednesday.
“Any time we’re looking at our program, our asset allocation, our business models, there’s going to be legitimate questions from our partners. What does this mean for us? What’s the direction? What’s the strategy going forward?” Eliopoulos told Buyouts. “I’ve actually been meeting with them [general partners] over the last six months, so I think the lines of communication are well opened.”
Earlier this year, the Wall Street Journal reported CalPERS was considering purchasing a PE firm — allowing it to keep a greater share of the returns generated by whatever companies are acquired — as well as making more direct investments.
Combining PE, public equity?
CalPERS might merge its private equity and public equity portfolios into a larger program, which it will refer to as “growth” holdings, as well. CalPERS is expected to release more information about its plans for the PE program this summer, spokespeople said.
“I’m excited about our initiative to look at alternative ways to invest in private equity. It’s very embryonic. It’s very early days, but I think long term that’s something CalPERS could be a leader in,” Chief Operating Investment Officer Wylie Tollette told Buyouts.
CalPERS launched its review of the private equity program before longtime PE chief Réal Desrochers left for a position at a large overseas bank earlier this year, spokesman Wayne Davis told Buyouts. Portfolio consultant PCA, which advised CalPERS on its PE investment decisions, resigned from its contract with the pension system in March.
Sarah Corr was elevated from within CalPERS to manage the portfolio on an interim basis. Meketa Investment Group was tapped to advise the PE program.
CalPERS’s approach to private equity shifted slowly over the past several years as it began concentrating its holding with fewer fund managers. In 2015, the system began reducing the number of PE firms that manage its holdings through several avenues, including sales on the secondary market. The retirement system also began committing larger amounts to new funds raised by its small group of “core” managers, such as Blackstone Group.
While CalPERS ends relationships with certain managers, passing on re-up opportunities and selling off stakes in older funds, both Tollette and Eliopoulos said their evolving approaches to private equity shouldn’t be interpreted as antagonism toward investment managers.
The system’s review of its PE portfolio came during a relatively fallow period for the program. CalPERS, which committed $3.3 billion to 2016 vintage funds, has not disclosed a new commitment to a private equity fund since it placed $150 million in Clayton, Dubilier & Rice Fund X in December, monthly investment disclosures show.
‘A marketplace for talent’
“This is a marketplace. It’s a marketplace for talent. And we’re very comfortable as investors operating in various marketplaces, including ones for talent,” Eliopoulos said. “Right now, there’s an incredible amount of capital looking for private equity talent.”
The amount of limited partner capital clamoring for space in funds managed by PE firms “gives the negotiating strength to the GPs in today’s marketplace. I think we’ve done well on terms, but the fee load is just one part of getting alignment,” he added. “We think we’re competing well.”
The $320 billion retirement system has cut the average management fee it pays to new commitments incrementally each year since 2012, investment documents show. It’s also collecting a greater share of each PE fund’s carried interest.
CalPERS in recent years has faced mounting pressure around the costs associated with its $25.7 billion private equity portfolio. These tensions were highlighted in exchanges between board member JJ Jelincic and Desrochers that attracted the scrutiny of elected officials like Treasurer John Chiang, also a CalPERS board member, and State Assemblyman Ken Cooley.
Assembly Bill 2833, signed into law by Gov. Jerry Brown last year, formalized the amount of information PE firms must provide to CalPERS, and how much of that information must be released to the public.
Action Item: For more information on CalPERS, visit, www.calpers.ca.gov