CalPERS CIO hints at possible PE cuts

Ted Eliopoulos cited controversies over fee transparency and its current governance system as the reason it may need to shrink its private equity allocation.

California Public Employees' Retirement System's (CalPERS) chief investment officer, Ted Eliopoulos, warned that board comments and negative media coverage over fee transparency is making it difficult for his team to invest in private equity.

In the public comments to the investment committee on Tuesday, Eliopoulos said: “Over the course of the past two years, and frequently in these monthly investment committee meetings, CalPERS staff is attacked and denigrated for our decision to invest in these funds and for the manner and transparency of our reporting of the fees, carried interest and expenses attached to these funds.”

“But the particular public nature and fishbowl of CalPERS may have reached a tipping point for us in private equity.”

He stridently defended the work of his team in demanding greater transparency from its GPs, while stressing the need for private equity's outsized returns to meet the fund's financial obligations.

The CIO also stressed his team's efforts on fee transparency, noting their work in conjunction with ILPA on a standardised approach towards fee and expense disclosure. Eliopoulos reported that ILPA invited CalPERS and small number of peers to meet with the new Securities and Exchange Commission chair in a matter of weeks to discuss the regulatory environment surrounding private equity investing.

He added that at an off-site meeting in July, the pension fund will be reviewing the private equity models available and working on building a more effective governance system for its PE investments.

“If we are not successful in finding a better solution, the asset allocation process will need to weigh a much-reduced allocation to private equity that we would have otherwise hoped for,” he said.

The members of the committee voiced support for Eliopoulos, but fell short of proposing any solutions to the negativity towards the pension fund's PE activity.

“I don't think you will find much appetite on the board in moving away from the private equity asset class,” said committee member Ron Lind. “Again, we need the returns it continues to provide.”

It was a point Eliopoulos stressed in these opening comments, citing that private equity is the only asset class whose return forecast is above 7 percent over the next ten years.

CalPERS has a total market value of $324.89 billion. The pension fund had a 8.9 percent allocation to private equity, with a strategic target of 10 percent, as at June 30, 2016.