CalPERS staff asks to change private equity allocation limits

The pension system is asking for room to make fewer, larger private equity investments.  

In May, Private Equity International reported that the California Public Employees’ Retirement System was reducing its private equity allocation in response to market conditions, and recent realizations. Now, the pension system is considering how to refine the allocation further. According to meeting documents released in advance of a June 16 meeting, CalPERS’ staff  is asking for approval to make bigger allocations to fewer GPs.

Currently, allocations over certain thresholds require investment committee approval, and the pension system is seeking to raise that threshold. Specifically, staff is proposing to increase the maximum exposure of the CalPERS’ private equity portfolio to a single firm from 10 percent to 15 percent.

Staff is also proposing increasing the maximum commitment amount to a fund managed by a second quartile firm from 0.75 percent of the policy target to 2 percent of the policy target. Secondaries could get a boost, as staff seeks to clarify that purchases made on the secondary market are not subject to current 25 percent concentration limits.

CalPERS’ says the move is the result of efforts to restructure their private equity portfolio that have been underway since 2011. That work involves reducing the number of manager relationships and recognizing the embedded maturity of secondaries investment vehicles.

Meeting documents note that investment officials think the private equity portfolio is overly diversified. In May, the pension system de-risked the portfolio by moving more funds into fixed income, PEI reported at the time. The next phase of this plan will be refining diversification by investing in multiple funds under one GP through a bigger allocation, instead of making several smaller allocations to many different GPs.

CalPERS’ currently allocates to some 400 different managers.  The pension system aims to bring that number down to just over 100.