CalPERS head warns of PE market ‘bubble’

Speaking at a Geneva-based conference, the pension giant’s chief investment officer Mark Anson said the US private equity market may be in peril as interest rates rise and hedge funds pour money into the sector.

The burgeoning US private equity market may be headed for a crash as interest rates rise and hedge funds, desperately seeking higher returns, dump money into the sector, warned Mark Anson, chief investment officer of the California Public Employees Retirements System (CalPERS), in Geneva.

According to Reuters, Anson told listeners assembled at the International Fund Management 2005 conference that the biggest asset bubble right now is private equity. “The current overhang of leveraged buyouts committed but not invested is $182 billion. A lot of money is chasing high yield. Hedge funds are competing with buyout managers and that convergence scares me.”

Anson reportedly said that if too much competing capital pushes down returns in long-term locked-up deals, at the same time as the price of money increases, then there is danger that investments will suffer as investors’ calculations are thrown off.

Back in December, CalPERS, which manages about $177 billion in assets – $20 billion of which are held in private equity –  announced a change in asset allocations, reducing its target commitment to private equity programmes by 1 percent (from 7 percent to 6 percent). At the time, CalPERS officials insisted the new asset mix did not represent a negative outlook for private equity, instead maintaining it would better reflect current holdings, reduce risks and save money on transaction costs.

The re-balancing moved the fund’s proportion of private equity exposure back to the level of October 2002, the date at which portfolio allocations were last amended.

Anson’s statements also follow an August announcement that CalPERS’ alternative investment assets – which include private equity, real estate and hedge funds – reported an increase of 12.7 percent, exceeding its 9.7 percent benchmark. For the 2003 to 2004 fiscal year, the private equity programme earned $1 billion in profits. Since its inception in 1990, the private equity arm has garnered CalPERS $6 billion.