- Denominator effect hits $193 bln pension
- PE allocation falls from 11.5 pct to 9.7 pct in 11 months
- “Staf must remain disciplined” amid PE fundraising surgesne
The California State Teachers’ Retirement System is bracing for hard choices as it readies its private equity portfolio for the top of the fundraising cycle, according to an investment plan released by the retirement system in advance of its July 9 meeting.
“With much of the industry in high-harvest mode, managers are fundraising on a more frequent basis,” according to the investment plan. “To ‘invest through the cycles’ staff must remain disciplined and make hard choices to avoid being swept along by the increasing momentum of the fundraising cycle.”
Private equity’s share of CalSTRS overall investment portfolio fell from 11.5 percent as of mid-2014 to just 9.7 percent by the end of May, according to its website. The decline was fueled by a surge in private equity distributions, which outpaced new capital calls, as well as soaring valuations within the retirement system’s public equity portfolio. This caused a denominator effect – as the overall size of the investment fund grew driven by big gains in public equities, the percentage of the fund allocated to private equity fell.
The $193 billion pension’s ability to generate meaningful, top-quartile returns from its 13 percent target allocation to private equity could be hamstrung by the current deal environment, where an accumulation of dry powder and ready availability of leverage pushed private equity deal valuations to heights not seen since the financial crisis.
Meanwhile, fundraising continues to surge. U.S. private equity firms raised $63.1 billion during the second quarter, more than any period since the economic recession, according to Buyouts data.
“Overall fund allocation models will have to be adjusted accordingly. Predicting private equity investment cycles is difficult at best and often counter-productive,” according to the investment plan.
A CalSTRS spokesman did not respond to requests for comment.
Even as it prepares for the top of the market, CalSTRS’ recent activity does not suggest a slower commitment pace. The retirement system committed a little less than $3.4 billion to private equity in the 12 month period ending on March 31, a 20 percent increase from the $2.85 billion it committed during the year ending March 31, 2014, according to pension documents.