CalSTRS board approves reorganisation of PE portfolio

The restructuring will allow CalSTRS to invest in ‘non-traditional’ private equity strategies with different return expectations and focus on co-investments.

California State Teachers’ Retirement System has green-lit a new private equity structure that makes room for opportunistic, long-term strategies in a changing private equity landscape.

The $233 billion pension plan’s private equity portfolio will now be divided into traditional and non-traditional strategies. The reorganisation had gone through multiple iterations before receiving approval at a board meeting on 8 May.

The traditional bucket houses buyouts, venture capital and debt related strategies, which account for almost 90 percent of CalSTRS’ $20 billion private equity portfolio. These will be tracked against peer benchmarks.

The non-traditional bucket is made up of longer-term strategies, special mandates and multi-strategy. These will use different benchmarks to reflect the lower returns expected from these strategies.

CalSTRS expects its allocation to these strategies to increase significantly in the coming years, Margot Wirth, director, private equity, said at a meeting in July.

Longer-term strategies do not generate quite as high returns as traditional private equity, but higher than public equities, Wirth explained to the board. Private equity firms charge lower fees and carried interest on these funds, and have lower friction costs, such as transaction fees and capital market expenses.

CalSTRS had already made a co-investment alongside a long-term fund, Wirth said.

Special mandates invests in board-mandated strategies such as new and next generation managers, and clean-tech/renewable energy managers. CalSTRS invests $250 million per year in this strategy through funds of funds managers, Wirth said.

CalSTRS is funding three managers in this strategy: Muller & Munroe, which invests in mid-market buyouts; Invesco, which invests in small and mid-sized funds and emerging managers spinning out from established groups; and HarbourVest Horizon, which invests in emerging and diverse managers and underserved markets.

Multi-strategy, incubated by the CalSTRS’ Innovations Group, combines private equity investments with other asset classes with lower expected returns such as fixed income, infrastructure, real estate and liquid strategies.

CalSTRS’ approved long-term target for buyouts within the private equity programme was increased to 74 percent from 69 percent to account for an increased focus on co-investments, Wirth said.

The long-term target for venture remained at 7 percent and the debt-related assets target was reduced from 15 percent to 9 percent. Longer-term strategies and special mandates were allocated long-term targets of 4 percent each and multi-strategy a target of 2 percent.

Focus on co-investments

CalSTRS has increased its focus on co-investments, which account for almost 7 percent of its private equity programme. This is expected to double in the next five years.

CalSTRS is trying to “play catch-up” in co-investments and expand in the rapidly changing environment, Wirth said at the meeting.

Last year, CalSTRS increased its co-investment limits to $250 million from $125 million. Staff was also given permission to enter co-investment deals earlier and absorb losses if a deal fell through.

Through the collaborative model, where it will coordinate internally across asset classes and with externally with peers, CalSTRS would also be able to co-invest with existing partners across platforms, Wirth said.

CalSTRS private equity has generated an internal rate of return of 13.1 percent since inception in 1988 and a total value to paid in capital multiple of 1.58x, as of 31 December, according to CalSTRS documents.

The PE portfolio had 373 active partnerships spread across 132 managers, and 48 active co-investments as of 31 December.