CalPERS posts lowest PE returns of the decade after ‘precipitous’ drop

Negative returns in credit, funds of funds and emerging markets dulled the $402bn institution’s PE performance last year, investment committee documents show.

The California Public Employees’ Retirement System has posted its lowest annual private equity returns of the decade after a sharp decline in the second half of last year.

The pension’s $26.1 billion private equity portfolio returned 2.9 percent for the full year on the back of a 1.4 percent return in Q3 and 0.2 percent the following quarter, according to documents prepared for its 16 March investment committee meeting. It had posted a 2.1 percent loss in Q1 and 3.5 percent for the second quarter.

Private equity underperformed its custom public benchmark across all time periods except the one-year time frame.

“Results of the private equity asset class showed a precipitous drop in the second half of 2019,” investment advisor Meketa noted in the documents.

The immaturity of CalPERS’ portfolio might have contributed to its underwhelming performance last year, a senior executive at a global LP advisory told Private Equity International on condition of anonymity.

CalPERS committed $6.9 billion to the asset class in 2019, more than any other post-crisis vintage. The 2018 and 2019-vintages account for nearly 60 percent of the programme’s unfunded commitments as of 31 December.

“Having a portfolio that mostly consists of more recent investments would impact the overall performance because you’re deploying capital and paying fees which are not generating a return yet,” the executive said.

The pension might also have been stung by its heavy exposure to mega-funds, which together with large funds account for 39 percent of private equity net asset value. Leveraged buyout purchase price multiples reached an all-time high of 11.5x in the fourth quarter, according to a Wilshire Associates document prepared for the CalPERS meeting. Concerns around an expected decline in returns from mega-funds are driving some LPs into other parts of the market, such as country funds and venture capital.

Credit, which accounts for 6.7 percent of its private equity NAV, was CalPERS’ worst performing sub-strategy at -4.2 percent for the year. Opportunistic private equity was the best performing at 8.8 percent for 2019, followed by venture capital at 5.8 percent.

Emerging markets, comprising just over 10 percent of the portfolio, delivered a negative 1.9 percent return last year, while its $18.3 billion US portfolio delivered 2.2 percent.

CalPERS’ holdings in developed Asia, which at $24 million represent a small portion of its overall portfolio, delivered a negative 51.7 percent return following markdowns of assets within a Japan-focused buyout fund, the documents noted.

Customised investment accounts, roughly 18 percent of the portfolio, were the best-performing structure with 5.2 percent. In December, the pension’s investment committee approved a change to alter its definition of a “customised investment account” in the CalPERS glossary of terms to provide staff more latitude in setting up specialised accounts.

CalPERS completed three commitments totalling $1.2 billion to US buyout funds in the second half of last year, the documents noted. The largest of these was $600 million to Green Equity Investors VIII, which closed on $12 billion in December.

The pension has an 8 percent target allocation to private equity and is considering how to ramp up this figure, as sister publication Buyouts reported. Potential routes include more co-investments, expanding its manager roster, or going direct.