Calpers continues steady march into private equity with $4bn target

The $ 300 billion Sacramento, Calif., pension’s target for the year ended June 30 continues the steady flow of capital into what’s been its best performing asset class for the last decade.

Calpers, the nation’s largest pension fund by assets, committed $ 3.3 billion to investments for the latest vintage year and $ 3 billion to the crop from 2015.

“Private equity has been our strongest performing asset class over the past 10 years,” said Réal Desrochers, Calpers’s managing investment director for private equity. The pension expects private equity “to continue to generate significant returns for the fund.”

But the challenge of maintaining the steady pace is complicated as Calpers restructures its portfolio and pushes to sever ties with many of the private equity firms handling its money. In 2015, it set itself an ambitious goal to cut the number of private equity managers in its portfolio to 30, from 100.

“We continue to work on reducing the risk, cost and complexity within the fund,” Desrochers said.

With the pension selling swathes of investments and holding managers to a higher bar for disclosure, the share of private equity shrunk to 8.9% of the its total portfolio as of June 30, down from 14.7% four years ago. Calpers’ allocation to private equity is below its 10% target.

The pension fund will have to jostle with other investors for spots in top funds as institutions seek to milk returns from private equity at an uncertain time.

Calpers’ plan to commit up to $ 4 billion for the year is a more measured approach than that of the frenzied years between 2006 and 2008. In a record high for its private equity investing programme in the past decade, it committed $ 11.9 billion to 2007 vintage-year investments. After the collapse of Lehman Brothers, Calpers’ commitments dipped below $ 1 billion for two years. But they have evened out since then.

As of June 30, more than half of its $ 26.4 billion private equity portfolio is tied up in bets it made between 2006 and 2008. These ageing holdings threaten to bring new monitoring headaches for Calpers in coming years, underscoring how the legacy of bubble-era buyouts still plagues investors a decade later.

Calpers compares its private equity performance against a benchmark composed of the public equity markets plus a premium. The pension is taking a hard look at that metric.

The private equity portfolio delivered net gains of 10.2% for the decade ended June 30, lagging that benchmark’s 12.7%, but outperformed the metric over the last 20 years.

“Calpers must articulate its investment goals and performance measures and ensure clear accountability for their execution,” Pension Consulting Alliance, its private-equity adviser, said in a November report.

Write to Dawn Lim at dawn.lim@wsj.com

This article was first published by The Wall Street Journal

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