Fund investments still dominate for CalPERS over long term

  • Fund investments net 10.1 pct annualized return over decade
  • Co-investments, directs underperform funds
  • CalPERS mulls more co-investments, directs, in cost-cut effort

Fund investments were the top-performing strategy of California Public Employees’ Retirement System’s private equity program over the previous decade, even as the $331.7 billion system explores alternative strategies to access PE returns.

The $17.1 billion portfolio of PE fund investments delivered a 10.1 percent annualized return in the decade, a Meketa Investment Group analysis of the program shows.

CalPERS’s fund holdings outperformed its $3.5 billion portfolio of customized separate accounts, as well as its $2.1 billion co-investment and direct investment program, according to the report. Both programs returned 7.5 percent annualized return over the previous 10 years.

Long-term returns from CalPERS’s program for co-investment and direct investments may have been hamstrung by holdings in assets acquired prior to the global financial crisis.

Notably, shorter-term returns for the program have been positive. Co-investments and directs netted a 29.1 percent return in the year ending June 30, thanks in large part to the “strong performance of a large U.S. direct investment,” according to the report.

CalPERS is exploring possibly setting up an external program for PE direct investments, as well as expanding its co-investment program, which could cut down the lofty costs associated with its overall private equity program.

During the 2015-2016 fiscal year, CalPERS paid PE fund managers more than $200 million in management fees — not including fund expenses or carried interest collected by general partners.

At a CalPERS board meeting in July, CIO Ted Eliopoulos recommended examining the pros and cons of “setting up a separate vehicle” for direct investments, Reutersreported.

In addition to exploring lower-cost alternatives to fund investing, CalPERS has been allocating larger amounts to fewer fund managers as part of an effort to reduce the total number of general partners in its portfolio. The retirement system committed $1.6 billion across just three managers — Apollo Global ManagementCVC Capital Partners and Silver Lake — in H1 2017.

Overall, CalPERS’s $25.9 billion PE program generated a 9.3 percent annualized return over the previous decade, the Meketa report shows. The program was underperforming its customized benchmark on one-year, three-year, five-year and 10-year bases.

CalPERS could not be reached for comment.

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