CalPERS to invest $36.5bn in private equity until 2020

The California Public Employees’ Retirement System (CalPERS) has forecast investing $36.5 billion in private equity commitments in the next five years leading up to 30 June 2020, according to the system’s Private Equity Annual Program Review.

CalPERS expects to commit $5.8 billion on private equity commitments in the current fiscal year, which ends 30 June 2016, with most of the amount, $4.3 billion, dedicated to buyout funds. It expects to peak its commitment level at $8.9 billion in the fiscal year 2018-2019.

The pension system reported that it has decreased its general partner relationships from 132 to 100 and hired an investment director to focus on co-investments. It is “progressing with significant restructuring and portfolio rebalancing” to promote manager selection and alignment and noted that “over-diversification negatively impacts performance” and “costs matter.”

As part of its initiative to increase transparency and improve reporting, CalPERS launched its Private Equity Accounting and Reporting Solution (PEARS) on 1 October. Planning for its PEARS Release 2 is underway and further details are expected this month.

“CalPERS will continue to partner with managers that deliver strong performance, and who want to work with CalPERS on both disclosure and transparency,” the review said.

CalPERS will focus on customised investment accounts and co-investments moving forward to have more control on its private equity programme, the report said.

As of 30 June, CalPERS’ customised investment accounts were valued at $1.5 billion and co-investments and direct investments at $1.5 billion, each accounting for 5 percent of total private equity net asset value (NAV) of $28.8 billion at the end of June, the report said.

Of that total NAV, buyouts accounted for $16.9 billion, or 59 percent. CalPERS’ target is to slightly increase its buyouts, credit-related and opportunistic portions of its private equity programme and decrease its exposure to venture capital and growth/expansion strategies.

The system had the most exposure in the US, at 51 percent of its private equity portfolio, and in the consumer related sector, at 23 percent, as of 31 March.

Its private equity commitments between the end of 2014 fiscal year and the second quarter of 2015 stood at $2.4 billion, with $13.6 billion in cumulative unfunded capital. It had committed $5.6 billion in the 2014 fiscal year, $3.8 billion in 2013, and $2.4 billion in 2012.

CalPERS’ private equity performance beat its benchmark in the 20 years leading up to 30 June, returning 12.3 percent compared with 11.4 percent for the benchmark. But it underperformed in the one-, three-, five- and 10-year periods.

Its portfolio risk lies in an expected decline in distributions from fund managers given its low level of contributions; the lack of diversity in vintage year with two thirds of its NAV concentrated in 2006-2008 funds; its unfunded commitments of $14.2 billion; and $3.9 billion NAV in fund of funds.

For the five-year strategic plan until 2020, CalPERS said it will reduce the complexity of private equity investing by concentrating its portfolio and seek better alignment through cost-effective structures.