CalPERS PE portfolio hurt by co-investments, directs

Investing through limited partnerships remained the best performing structure within the US’s largest public pension fund’s private equity portfolio in 2016.

The California Public Employees’ Retirement System (CalPERS) saw co-investment and direct investment structures continue to drag on the pension fund’s overall private equity portfolio across various time periods ended 31 December.

The Sacramento-based pension fund has $25.4 billion in net asset value for its private equity programme, of which 7 percent is dedicated to co-investments and direct investments lumped into one bucket.

The PE NAV represents 8.4 percent of the total CalPERS portfolio, which is 0.4 percent above its newly proposed interim target of 8 percent but well below its 12 percent long-term target allocation.

For the second half of 2016, co-investments and directs underperformed, causing the overall private equity portfolio to lag, according to the CalPERS Private Equity Program Semi-Annual Performance Report.

The co-investment and direct investing structure delivered 4.1 percent, 0.2 percent, 6.7 percent and 6.6 percent return on invested capital for the one-year, three-year, five-year and 10-year periods ending 31 December, according to the report.

By comparison, the overall private equity programme – which also includes partnerships, custom accounts, fund of funds and secondaries – generated 6.6 percent, 8.8 percent, 11.5 percent and 9.8 percent for those respective periods, boosted largely by partnership structures, the report said.

Although the report does not go into detail, it mentioned that direct investments have fared better than co-investments long-term, but are a small contributor to overall performance.

The lagging co-investment performance is nothing new to CalPERS. In August, Private Equity International reported that the co-investment and direct portion of CalPERS’ private equity portfolio was the worst-performing structure for the fiscal year ended 30 June, returning a loss of 4.4 percent. At that time, the co-investment and direct programme accounted for 6 percent of the overall private equity programme – up from 5 percent during the fiscal year ended 30 June 2015.

CalPERS stated in 2015 its intent to increase its co-investment programme as a portion of its overall private equity portfolio as it wants to have a more active role in its private equity investing.

CalPERS chief investment officer Ted Eliopoulos also recently said that the pension plan is studying ways to increase its direct investment activity, referring to the direct capabilities established by its Canadian counterparts.

Performance of the overall private equity programme of the US’s largest public pension fund in 2016 was up from 5.5 percent returns generated in the previous year ending 31 December 2015.

However, it underperformed its benchmark in 2016, which consists of FTSE US Total Market Index and FTSE All-World ex-US Total Market Index, plus 3 percent, for all time periods ended 31 December. CalPERS cited rising public markets as the main reason for the underperformance.

Partnerships were the best performer of all structures, returning 8.1 percent for the year, 8.9 percent for three years, 12.1 percent for five years and 10.6 percent for 10 years ended 31 December.

By strategy, venture capital was the weakest performer, generating a 6.3 percent loss for the one-year period ended 31 December and just 4.9 percent for the 10-year period. The report said it has been the weakest performer mainly due to two underperforming investments with one of the largest fund managers associated with CalPERS’ venture capital strategy.

It was unclear which fund manager the report was referring to. The best-performing private equity strategy was buyout, which returned 9.7 percent for the year ended 31 December and 10.9 percent for the 10-year period.

A CalPERS spokeswoman was unavailable to comment.