CalPERS moves toward changes in PE allocation

The California Public Employees' Retirement System is shifting its interim target allocation to private equity in response to unexpected level of returns from the portfolio, according to documents released by CalPERS in advance of a 14 April meeting.

CalPERS is decreasing its private equity target allocation from 12 percent to 10 percent, a change that will take effect on 1 July. The pension plans to increase the target to 11 percent by July 2015 and end up at 12 percent by July 2016.

To meet its previous 12 percent target allocation, CalPERS would have had to commit upwards of $10.5 billion per year to the strategy. Meeting documents show that the target and realised returns for private equity allocations over the previous three years more or less overlap, but looking forward investment officials have some concerns. 

“[T]he asset class where market conditions are of the greatest concern to staff is Private Equity,” the documents note. “Within this segment a number of aspects combine to make staff very cautious about attempting to deploy too much capital.”

CalPERS notes that keeping current capital commitment levels would have been difficult to square against maintaining “the discipline of concentrating allocations with managers expected to be top performing.”

The concerns listed point to the year-end 2013 dry-powder figure, which was $903 billion. Capital commitments in 2013 totaled $342 billion, the largest since 2008, and leveraged loan and high-yield debt issuance were also at “all time” high levels. 

The new allocation will also put greater emphasis on fixed income and global equity markets.  The pension fund takes a look at its strategic allocations every three years and makes changes accordingly.

In a separate memorandum, the Pension Consulting Alliance (PCA) says it supports the allocation change as being market driven, and reemphasizes the need for discipline. 

The documents also noted a recent new private equity allocation of $200 million to CDH Fund V.  CDH Fund V focuses on growth-stage investments in private companies in China, and closed in January at its $2.5 billion hard-cap. The fund was oversubscribed.