Meketa: Cutting PE relationships may have weakened CalPERS’ effectiveness

  • Having just 30 core PE relationships “may limit the effectiveness” of program
  • CalPERS started scaling back relationships in 2015
  • Fewer relationships didn’t lead to reduced fees or more co-investment

California Public Employees’ Retirement System’s decision to reduce the number of relationships with private equity managers may have damaged the public pension’s ability to deploy capital and generate outsize returns, according to a new report from CalPERS’s board consultant.

Meketa Investment Group found that the $343.9 billion retirement system’s strategy of limiting new commitments to its “Core 30” group of managers may limit the effectiveness of its PE program.

And new opportunities appear to be dwindling.

CalPERS’s private equity staff received 110 investment proposals during the previous fiscal year, compared with 115 proposals in FY 2015-2016 and 164 in FY 2014-2015. CalPERS allocated less capital to its top-performing asset class as the number of investment proposals shrunk — even as overall PE fundraising ballooned during the same period.

“A number of successful GPs have told us that we’ve become too unpredictable to do business with,” CalPERS Investment Director John Cole said in a July presentation. GPs are also cutting back the amounts they’re willing to allocate to CalPERS within their funds, he said.

Personnel changes may represent another factor. Earlier this year former PE chiefReal Desrochers left CalPERS for a position at CITIC Private Equity Funds Management. A reorganization moved 10 of the PE program’s 50 staff members to an analytical unit focused on the asset class, spokeswoman Megan White wrote in an email.

CalPERS declined to comment on the Meketa report, which will be presented at its board meeting next week.

“Overall, we note a trend of fewer proposals and fewer commitments in recent years, which seems unexpected given the strong fund raising environment. We have not researched the reasons for this decline,” the Meketa report says.

Meketa did not respond to a request for comment.


Meketa drew its conclusions from conversations and other interactions with CalPERS staff, who indicated the level of effort required to monitor the $25.89 billion PE program hasn’t diminished as its number of relationships fell.

Perhaps more strikingly, the strategy may not have led to any meaningful discounts on investment fees — a chief selling point when CIO Ted Eliopoulos announced the plan back in 2015.

The goal was “to gain the best deal on costs and fees we can,” Eliopoulos told The Wall Street Journal in 2015.

That goal has been complicated by growing demand for the asset class. As more LPs piled more money into private equity, firms gained “negotiating strength … in today’s marketplace. I think we’ve done well on terms, but the fee load is just one part of getting alignment,” Eliopoulos told Buyouts earlier this year. “We think we’re competing well.”

Furthermore, co-investment and separate account opportunities are not being pursued or executed with the “Core 30” managers. Those strategies typically come with reduced management fees or carried interest.

“CalPERS is not fullying realizing the opportunities available to partner with the Core 30 managers,” according to the report.

Harder to pace

The significant paring back of manager relationships has also made it much more difficult to secure enough commitments to keep CalPERS in line with its long-term asset allocation, according to the report. Commitment pacing is “largely dictated by the Core managers’ decisions to raise new funds.”

Even then, strong demand from other limited partners may result in the retirement system failing to secure its desired allocation to the fund. Returns may have suffered as well.

“Core 30 managers are concentrated in mega and large buyout strategy as they are most likely to be able to receive the relatively large commitments from CalPERS. Other strategies such as mid and small buyouts, and growth could provide stronger returns as well as strategy and manager diversification,” according to Meketa.

PE remains top performer

Despite Meketa’s findings, private equity remains a bright spot for CalPERS in an environment marked by near-record low interest rates. The portfolio returned 13.9 percent during the 2016-2017 fiscal year, outstripping every other asset class except for public equities.

CalPERS plans to allocate up to $4 billion to PE over the current fiscal year, which would be a significant uptick from the $3.3 billion it committed to the asset class during FY 2016-2017. In September, the retirement system committed $75 million to TPG’s $2 billion Rise Fund, which is leveraging the firm’s growth equity platform for impact investments.

CalPERS is weighing a complete restructuring of its private equity program, which could involve handing some control to an outside asset manager such as BlackRock. The retirement system is also exploring forming separate, outside investment entities with other large institutional investors, like UC Board of Regents.

Action Item: To read the Meketa report, visit