CalPERS proposes changes to PE investment policy

California Public Employees’ Retirement System, the US’s largest public pension, is proposing changes to simplify its private equity programme’s policy.

At an investment committee gathering on 18 June the $356 billion pension fund will discuss changes including scrapping the direct investments category and increasing the allocation target and range for buyouts, according to documents prepared for the meeting.

CalPERS and its private equity investment consultant Meketa Investment Group did not expand on the plan to delete the direct investment category from the policy, besides Meketa noting that it “understand[s] that authority for direct investments will be considered at a later date”.

In May, CalPERS announced plans to launch a direct private equity programme that would comprise two funds: one focusing on late-stage investments in technology, life sciences and healthcare, and another on long-term investments in established companies. The programme is scheduled to launch in the first half of next year, pending final review and approval by the CalPERS board.

According to documents prepared for the upcoming meeting, the proposed revisions to the policy are intended to: increase consistency and clarity, remove duplicative or procedural content where appropriate and ensure alignment with business enhancement.

CalPERS staff have suggested increasing the strategy allocation target for buyouts from 60 percent to 65 percent and the allocation range from 50-70 percent to 55-75 percent. This would be achieved by decreasing the allocation targets and ranges for credit-related investments from 15 percent and 10-25 percent to 10 percent and 0-15 percent, respectively.

Meketa noted that according to staff, some credit-related strategies are being invested through CalPERS’ opportunistic programme, thereby reducing the investment set available under the umbrella of the private equity programme.

CalPERS staff are also propping a transition to a “dollar-oriented” authority on its per-investment limits from “percent of total fund” limits on the grounds this would provide clearer guidance as  limits would no longer fluctuate based on changes to the size of the total plan. The dollar limits proposed – which differ for the private equity programme’s managing investment director and the chief investment officer – are calculated for a total plan value of approximately $356 billion, Meketa noted.

The pension’s current private equity policy also includes an allocation limit for first-quartile funds and a separate, lower limit for second-quartile funds, which would be eliminated under the new proposal. These “sub-limits” have also been scrapped for emerging manager funds.

“Staff evaluates potential fund investments across a broad range of quantitative and qualitative factors. We have noted that, while important, quartile ranking of past performance is not fully indicative of the potential future performance of a private equity manager, particularly early in a fund’s life,” Meketa noted in its opinion letter.

The chief investment officer would also no longer have the ability to increase committed capital to an existing customised investment account without approval from the investment committee. Under the current policy, the CIO can increase the commitment by up to 20 percent provided the vehicle has top quartile performance.

Co-investments would no longer be limited to just alongside the fund in which CalPERS has made a commitment, but could be made in any opportunity proposed by a manager with which the programme has an active commitment, regardless of the exact fund.