CalPERS: Manager concentration pays

The pension system, with $237bn in assets, has worked to reduce its number of manager relationships and appears ready to continue the process.

Sometimes less is more.

The California Public Employees’ Retirement System has been reducing its number of manager relationships through sales on the private equity secondaries market. And the $237 billion pension system plans to keep on cutting.

“Pays to be concentrated. Pays to be with the right managers. Really working on that,” said Réal Désrochers, senior investment officer at the pension, at Monday’s pension board meeting, according to a transcript.

“Eighty percent of returns today driven by 65 managers. Seventy-five percent [by] 40 funds. Forty percent by 10 managers,” Désrochers said.

While it's tough to prove that the more concentrated nature of the system's private equity portfolio has helped boost performance, CalPERS on Monday did report preliminary returns for fiscal 2011 showing that its Alternative Investment Management programme yielded a 25.3 percent return. The private equity preliminary returns helped drive an overall preliminary return of 20.7 percent, which would be the system's best in 14 years.

Concentration of the private equity portfolio “has been an ongoing strategy for the past few years”, a CalPERS spokesperson told Private Equity International. “The goal is always to focus on top quartile performers, and we’ve used secondary sales as part of this consolidation strategy to keep the line-up manageable and eliminate redundancy of also-ran funds.”

The pension engaged in one of the largest private equity secondary sales ever, when it sold $2.6 billion on the market in 2008. The pension also sold at least $1 billion of mostly mega-fund stakes earlier this year, though the large buyout portion of the pension’s private equity holdings apparently helped drive this year's projected return, Désrochers told the pension board.

“Returns attributed to the large buyout part of the portfolio, which [has] increased in value substantially over the past year,” he said.

Many public pensions in the US have been consolidating their private equity portfolios, reducing the number of managers to make the programmes more manageable for in-house staff. So far this year, pensions in New Jersey, New York City, North Carolina, the Ohio School Employees Retirement System and the New Mexico State Investment Council have sold or are in the process of putting together sales of private equity stakes.