The California Public Employees’ Retirement System, the US’s largest public pension, is actively considering the part China plays in its portfolio in the context of recent policy shocks.
A board member for the pension plan with $490 billion assets under management raised concerns about China’s place in the portfolio at the most recent investment committee meeting on 13 September.
Margaret Brown asked interim chief investment officer Dan Bienvenue how the Chinese government “taking over” or “limiting companies” would impact the pension’s investments in the region.
CalPERS’ previous CIO, Ben Meng, resigned in August last year after less than two years in the role. In July, Meng resurfaced at Franklin Templeton where he will help expand the asset manager’s alternatives offerings across Asia-Pacific.
“As far as balancing the risk and returns in China, it is a great question and one that the investment staff frankly debates fairly consistently,” said Bienvenue, noting that the most populous country in the world wields the second-largest economy and is the largest contributor to the world’s economic growth.
“Relative to the economy in general, [China] is underrepresented in our portfolio and in the capital markets,” he added.
Bienvenue pointed to the regulatory risk, specifically noting the Chinese government’s recent proclamation that education companies must operate on a not-for-profit basis.
“In the private equity portfolio the exposure was very, very limited,” he noted.
Following the government’s action, “there’s been a drawdown” in both private valuation marks and public equities, according to Bienvenue. It would be difficult, however, to attribute a dollar amount to the change in the portfolio based on the recent policy, he said.
“The private markets valuations, as we know, [are] as much art as science,” he added.
The chairwoman of the board also expressed concern and directed the investment committee to prepare future remarks to outline the programme’s China-related investments and associated risks.
The CalPERS committee approved $5.1 billion-worth of commitments to 18 private equity funds at the meeting. The commitments include $1.4 billion to Berkeley Street Strategic Solutions, $600 million to KKR North America Fund XIII and $500 million to Trident IX. None of the new commitments were funds focused on China, PEI understands.
In the region, CalPERS committed $380 million to the 2018-vintage PAG Asia Capital III, $300 million to the 2020-vintage KKR Asian Fund IV and $200 million to 2018 CVC Capital Partners Asia Pacific V.
CalPERS committed $50 million in 2007 to AACP China Growth Investors, $10 million in 2008 to AACP China Debt Investors and $5 million in 2007 to AACP China Venture Investors A. These are co-investment pools with San-Francisco-based fund of funds manager Asia Alternatives Management.
Chinese investments make up approximately 2 percent of the total portfolio across all asset classes, according to a spokesperson for CalPERS. The breakdown of public and private exposure was not available.
While Asian fundraising has lagged since 2018, Chinese venture capital is a partial exception to the rule. Chinese firms raised $6.6 billion over 15 funds in the first half of 2021, exceeding the $4.4 billion across 17 funds for the entirety of 2020 and $6.2 billion over 25 funds in 2019, according to PEI data. If the momentum continues in the second half of this year, fundraising levels may approach the $13.8 billion collected in 2011 – the high water mark for the region in venture.
Chinese private equity was dealt a blow in late July by the US Securities and Exchange Commission. The SEC said it would start requiring Chinese companies hoping to raise money in the US to disclose their legal structures and the risk of China’s government interfering in their business.
“Relative to other parts of Asia, the China portfolio has delivered some pretty incredible returns over the past decade,” Yup Kim, then senior portfolio manager at Alaska Permanent Fund Corporation, told Private Equity International in May 2020. He is now the head of PE investments at CalPERS under PE head Greg Ruiz.
CalPERS has an 8 percent target allocation to private equity that currently stands at 8.3 percent.
The pension reported a 43.8 percent net PE return for the year ending 30 June. Public equities returned 36.3 percent, and the overall portfolio returned 21.3 percent in the same period.
CalPERS may also have benefitted from its recent pivot towards co-investments and diversification into growth investing. This forms part of a new long-term approach to the asset class under Ruiz and Kim, details of which the latter shared via LinkedIn earlier this year.