The underperformance of the California Public Employees’ Retirement System’s private equity programme relative to peer benchmarks boils down to a lack of consistent capital deployment and lack of strategic consistency, according to its head of private equity, Greg Ruiz.
Speaking at the pension system’s investment committee meeting on Monday, Ruiz noted its $24.6 billion PE portfolio was not “near its potential” for a number of reasons.
“Historically, we’ve been highly inconsistent with our capital deployment,” he said. “And the truth is, that has hurt us.
“Consistent capital deployment does not guarantee success. But inconsistent capital deployment creates a self-imposed obstacle that is difficult to overcome. If we continue to deploy capital inconsistently, I would expect continued underperformance.”
The $410 billion pension, the largest public pension plan in the US, had its PE returns fall to -5.1 percent in fiscal year 2019-20, which ended on 30 June. This compared with 7.7 percent a year before. PE, as well as other financial assets, experienced significant volatility during the 12-month period, with both CalPERS’ portfolio and the policy benchmark producing negative returns, according to meeting materials prepared by Meketa Investment Group.
Over the past year, private equity performance has deteriorated on an absolute basis across all time periods, according to the pension. CalPERS’ PE programme has also consistently underperformed published industry benchmarks across all time periods. Its PE portfolio’s 10-year net internal rate of return as of the end of March stood at 11.71 percent; this compared with 12.78 percent for the Cambridge Private Equity Index and 12.49 percent for the State Street Private Equity Index, according to pension documents published Monday.
Along with inconsistent capital deployment and strategic direction, Ruiz noted CalPERS’ PE portfolio lacked diversification and had “not kept pace” with how the PE market had evolved over the last decade. According to meeting materials, CalPERS had limited allocations to strong performing strategies, such as growth, and high allocations to lower performing strategies, including funds of funds, credit and energy.
The lack of cost efficiency was also a driver of underperformance, according to Ruiz. CalPERS had higher total programme costs relative to its peers, given the lack of a co-investment programme. Last year, CalPERS restarted its co-investment programme after suspending it in 2016 due to challenges around speed of execution.
To address key issues related to underperformance, Ruiz said focusing on talent and ensuring that “active and thoughtful engagement and alignment from the board to CalPERS senior leadership to the investment office and the private equity team” would be the critical first step.
The PE portfolio’s net asset value as of 30 June was $24.6 billion, a decrease of $1.8 billion on the end of December. The current NAV represents 6.3 percent of the total fund, compared with an 8 percent target, according to meeting materials from Meketa.
The pension system made 20 commitments totalling $9 billion in the first half of 2020 and 23 commitments totalling $10.1 billion from July 2019 through June 2020, Meketa’s report noted. Among its largest commitments are $850 million to CVC Capital Partners VIII and $800 million to Silver Lake Partners VI. It also committed $300 million to Ardian Secondary Fund VIII.
Ben Meng resigned last month as CalPERS’ chief investment officer after less than two years in the role. His resignation followed a complaint filed with the California Fair Political Practices Commission on his stock holdings.
Meng had set out to implement a “better assets and more assets” strategy that would help CalPERS meet its 7 percent long-term return target by leveraging up to 20 percent of the current fund, or close to $80 billion, over the next three years.
Pension documents show that CalPERS’ priority initiatives for PE in 2020-21 include: carrying out a strategic planning process; focusing on core capabilities, such as effective underwriting, engaged monitoring and partnership with high-quality managers; ramping up its co-investment programme; deeper integration of data into its business and decision-making processes; and a deeper focus on and integration of environmental, social and governance criteria as well as diversity and inclusion.
– Justin Mitchell contributed to this report.