CalPERS to halve its external fund managers

The California Public Employees’ Retirement System is reducing the number of external money managers it works with by about half to minimise costs, CalPERS chief investment officer Ted Eliopoulos said in a conference call.

CalPERS, which currently works with 212 money managers including The Carlyle Group and KKR, will be cutting the number down to about 100, in a move that could have huge implications for many private equity GPs. It plans to leave its allocation to alternatives broadly the same, which means bigger allocations to fewer managers.

“Our benefit payments are now greater than the sum of our contributions and investment income, which makes it even more crucial and critical that we minimise costs going forward and have very strategic, meaningful relationships that scale with the managers we need access to,” Eliopoulos said.

CalPERS, based in Sacramento, Calif., is the largest pension fund in the US with $305.30 billion (£199.00 billion; €270.57 billion) in assets under management. It has committed $72.70 billion in capital to date with investment sizes between $200 and $500 million, according to PEI’s Research & Analytics division.

The decision, first reported in the Wall Street Journal, is significant because CalPERS has been investing in alternative assets for more than 70 years. As of last month, it had allocated 19.69 percent of its $305.30 billion investment portfolio to alternative investments, with 9.47 percent specifically to private equity, according to PEI’s Research & Analytics division. 

In the decade leading up to 2013, private equity served as the most profitable alternative asset for the fund, with annualised returns of 11.46 percent net of fees.

This is not the first time CalPERS has severed ties with an external manager. In September 2012, it ended its relationship with Centinela Capital Partners, an emerging market fund of funds. For the past eight years or so, CalPERS has been restructuring its portfolio by making significant reductions in cost and number of partners.

In the conference call, CalPERS chief investment operating officer Wylie Tollette said the fund cut the number of external managers from approximately 300 in 2007 to 212 today. That allowed for cost savings of $293 million in the past five years, he said, and this latest announcement is part of an ongoing cost reduction strategy.

“We hope to have substantial cost savings moving forward,” he said. “We’ll measure ourselves annually for five years going forward.”

Calling it a “daunting task” to manage many relationships, Eliopoulos said the fund will use the same criteria and process in place to identify and select new managers. He said fewer managers will form a stronger, more well-strategised portfolio for CalPERS.

CalPERS is planning to tell its investment committee of this reduction plan at their next meeting on 15 June.