CalPERS makes big PE pivot to co-investments and separate accounts

The $445bn pension's commitments to the lower-fee structures significantly dwarfed its fund commitments in its latest investment report.

The California Public Employees’ Retirement System leaned heavily into private equity co-investments and separately managed accounts in the final part of last year, making good on a pledge to focus more on those structures as it seeks to reboot its $30.8 billion programme.

In total, CalPERS committed just under $4.3 billion to private equity between September of last year and the end of January this year, with $3.5 billion of that deployed during the fourth quarter of 2020.

The US’s biggest public pension committed $900 million to fund investments with TCV‘s 11th fund and Thoma Bravo‘s 14th flagship fund.

CalPERS committed $2 billion to five customised investment accounts, defined on the pension’s website as an investment structure wherein CalPERS is the sole investor.  These are also commonly known as “separately managed accounts.” Managers that sister title Buyouts confirmed through regulatory filings or CalPERS documents included Ardian, AlpInvest Partners and EQT.

In 2019, CalPERS changed its rules for customised accounts to provide itself more options, as Buyouts reported.

The rest of the Q4 capital went to co-investments with Blackstone, Onex, Advent International and Summit Partners, among others.

Two more commitments were noted from January of this year, though their structures are not clear. CalPERS committed another $600 million to a fund called Greenleaf Co-Invest Partners, LP, which is managed by the Carlyle Group, and $25 million to United Physician Management Holdings, LP, a vehicle apparently connected to the recent purchase by Ares Management and Atlas Partners of a women’s health care company. Sister title PE Hub reported on that deal.

Private equity head Greg Ruiz told the investment committee last September that these structures would be the primary way to increase the program’s cost efficiency for now, as Buyouts reported.

Last year, the pension hired Alaska Permanent Fund veteran Yup Kim to work under Ruiz as an investment director. In a LinkedIn post from earlier this month, Kim shared some long-term plans for the programme, which included increased co-investments.

“Co-investments offer meaningful flexibility to our long-term partnerships,” Kim wrote. He also said the fund had deployed “significant capital” into co-investments since restarting its program in fiscal year 2020.

Co-investments are increasingly popular among LPs as a way of keeping costs down. CalPERS’ sister system, California State Teachers’ Retirement System, committed slightly more capital to co-investments than traditional funds in the second half of 2020, as Buyouts reported.

What appears to still be on the backburner for the time being is CalPERS’s ambitious “Pillars III and IV” plan to build two outside-run private equity funds with CalPERS as the sole LP. Since being tentatively approved in 2019, virtually no public information has been released, though in September staff did suggest to Buyouts the plan was still moving forward as part of a larger strategy.

Meanwhile, CalPERS’ private equity performance as of 31 December was an improvement over the year before, which, as Buyouts reported, saw the pension’s slowest returns in a decade.

Last year, a resilient PE market dynamic appeared to buoy CalPERS’s portfolio. As of 31 December, lagged by a quarter, the portfolio returned 12.5 percent over one year and 9.2 percent over three years, beating its benchmarks. However, five and 10-year returns were slightly behind their policy benchmarks.

Still, according to a report from consultant Wilshire, the last two quarters of 2020 saw the PE programme’s best two-quarter stretch since the 2008 financial crisis.

As of 12 March, CalPERS’ total fund was valued at $445.15 billion. The pension declined to comment for this story.