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PE Panorama: With new plans, CalPERS takes a better approach to private equity

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By Paul Mackintosh   
October 4, 2021

California Public Employees' Retirement System (CalPERS), the biggest pension fund in the US, is about to ramp up its human resources to support larger commitments to alternatives and private assets, and above all, private equity, according to a report in Business Insider.

CalPERS held over US$469 billion in assets at the end of its last financial on June 30, 2021 and reported a preliminary net return of 21.3% for the year, an exceptional performance compared to its 30-year annualised average return of 8.4%. Private equity was a particularly strong contributor to that performance, with a net return of 43.8%.

And now the fund is looking to raise its private equity allocation from the current 8%, to 12%-13%, and will staff up to do so, according to the Business Insider report, quoting remarks by CalPERS CEO Marcie Frost made at the Greenwich Economic Forum.

CalPERS’s estimated funding status for the last financial year stood at 80%, but that figure is based on a single exceptional year. The pension fund clearly has a need and an obligation to improve its performance to meet commitments to members, barring some new infusion of capital at the state or federal level.

According to Frost, CalPERS is looking to invest “in a more high quality way” and with “better relationships” than hitherto as it seeks to allocate more and more widely. What that means in practice remains to be seen, but she indicated that CalPERS will also seek to allocate more to infrastructure, real estate, and private debt. As for its $40 billion private equity programme, Frost said the fund would seek to staff up to support its co-investment and separately managed accounts programmes.

So CalPERS appears to be on the right track towards being a more differentiated, value-adding private equity investor. Co-investments allow limited partner (LP) investors to take a larger slice of the returns than straightforward fund investments, although they also place more demands upon the expertise of the LP partner. Separately managed accounts, meanwhile, allow lower fees and other benefits for the largest and most significant investors with a private equity firm. Again, this is more than plain vanilla LP investment into funds, and requires commensurate expertise.

Readers will know my scepticism about real returns from private equity, and my views on CalPERS’s chequered past with the asset class. I will say this time that CalPERS is pursuing a better way to extract value from private equity, short of becoming a direct investor in its own right. But it also illustrates how essential in-house knowledge and capabilities are in order to do that. There’s no cheap and easy way to squeeze value from private equity, and smaller, less well-resourced institutions might be better off not trying.