CalPERS stresses strong PE managers amid internal shift

The $315bn pension plan wants its internal PE investment team to focus on identifying skilled managers rather than worrying about meeting the target asset allocation.

The California Public Employees' Retirement System wants to focus on identifying the top private equity managers as it looks to combine private and global equities into one “growth” bucket.

The US's largest public pension recommended at its investment committee meeting on Monday that the $315 billion fund merge its private equity category, which takes up 8 percent of its assets, with its global equity portfolio that accounts for almost half, or 46 percent, of its assets, as previously reported by Private Equity International .

This move would take certain burdens off the internal private equity team at CalPERS, while allowing it to focus on identifying top-performing managers in the asset class, CalPERS managing investment director of asset allocation and risk management Eric Baggesen explained at the Monday meeting.

“On the one hand we're asking them to identify the managers that have the most skill in the marketplace because there's a huge dispersion in outcome that happen across the private equity managers, and at the same time they're basically chasing the structure of the asset allocation by committing money,” Baggesen said at the meeting, noting that those two objectives are inherently in conflict with each other.

“What we are trying to achieve with the recommendation is to really have the private equity team just focus on identifying managers that we believe have the greatest skill in the marketplace, and then trying to create a rational relationship with those managers, not making them sensitive to whether we are under- or over-allocated to the asset area.”

Baggesen's remarks come at a time when the Sacramento-based pension fund has been working to cull its external manager relationships and improve transparency within the private equity asset class. For example, CalPERS had relationships with 91 private equity managers on 31 December, according to its chief investment officer performance report from that month, down from 119 managers on 30 June 2015 .

The pension fund also released its first-ever carried interest data in late 2015 and endorsed the Institutional Limited Partners Association'sstandardised fee reporting template– both in an effort to increase transparency in its private equity portfolio.

The recommended structural shift at CalPERS would allow the internal private equity investment staff to have dialogues with external fund managers aimed at a better understanding of the manager strategy and forecasts, according to Baggesen.

“I think the most important outcome of doing this is changing the way people in the investment office think and to raise their focus up to a larger set of outcomes, to a bigger part of the portfolio, away from the tunnelled-down, small things that so many people in the investment office spend tremendous amounts of their time [on],” he said.

CalPERS managing investment director of global equity Dan Bienvenue added this move would push the private and public equities team to work together and build on each other's knowledge. He also noted that they are not “merging” the two teams, as the existing private equity team will continue to stand alone within the growth category.

CalPERS' private equity team is currently led by investment director Sarah Corr, after the former managing investment director Réal Desrochers left the pension fund after six years. Last month, the pension fund also named a new private equity external consultant, Meketa Investment Group, after its former advisor, Pension Consulting Alliance, resigned, as reported by PEI .