CalPERS’ PE portfolio disappoints for 2015-16 year

In the fiscal year ended 30 June, the US’s largest pension fund saw a drop in its PE portfolio performance – both compared with the previous year and with its benchmark.

It was a hard year for the California Public Employees’ Retirement System’s (CalPERS) private equity portfolio.

According to the Sacramento-based pension fund’s Comprehensive Annual Financial Report (CAFR) for the fiscal year ended 30 June, released on Thursday, its private equity returns in most observed time periods fell compared with those from the previous fiscal year.

This is significant for the largest US public pension fund, which allocates a massive $26.15 billion, or 8.7 percent, of its $302 billion portfolio to the asset class. During the fiscal year, it had a target allocation of 10 percent to private equity. CalPERS reduced that allocation to 8 percent in December for fiscal year 2016-2017.

In the one-year period leading up to 30 June, CalPERS’ private equity portfolio returned 1.7 percent time-weighted net internal rate of return, a decrease from the 8.9 percent net IRR for the same period ending 30 June 2015.

The three-year timeframe achieved a 10 percent net IRR, versus 14.1 percent the prior year. In the five years until 30 June, a net IRR of 9.7 percent was realised, also a drop from 14.4 percent in the previous year. The 10 year period – the longest listed in the report – marked a 10.2 percent return in the most recent fiscal year, slightly below the 11.9 percent from the year prior.

For the US’s largest public pension fund, the private equity asset class, commonly regarded as an outperformer in longer time horizons, also missed its benchmark performance for the 2015-2016 fiscal year.

In the three-, five- and 10-year return periods, CalPERS’ private equity portfolio returns came short of their respective FTSE-based benchmark returns by 0.8, 0.9 and 2.5 percentage points, according to the CAFR.

One-year returns were the only timeframe in which CalPERS beat the benchmark, which produced a negative return of -0.8 percent, by 2.5 percent basis points.

Returns weren’t the only numbers that decreased during the 2015-2016 fiscal year for CalPERS.

The private equity portion of the fund’s total investment commitments, which also include real assets and other investments, measured at net asset value fell dramatically, to 36.6 percent from 69.2 percent in the prior fiscal year.

Private equity took the biggest slice of the pie for unfunded investment commitments, at 77.6 percent of the total unfunded amount, versus 56.3 percent of the total last year.

During the latest fiscal year, CalPERS awarded $489.8 million in carried interest to 117 private equity fund managers, and paid $206.5 million in net management fees to 184 managers, according to the CAFR.

After the 2015-2016 fiscal year ended, in December, CalPERS reduced its interim private equity allocation to 8 percent from 10 percent, as reported by Private Equity International. The pension made the move citing “a very challenging environment going forward” and pressure on cash flow to make benefit payments to its members.

A CalPERS spokeswoman was not available to comment.