CalSTRS: ‘Co-investments should be increased’

The California State Teachers’ Retirement System says increasing the pension’s private equity co-investments over the next three to four years gives the “greatest opportunity for improving performance” and reducing fees.

Investment staff at the $219.2 billion pension believe “increased co-investing provides the best means to prepare private equity to engage in more advanced forms of direct investing in the future”, according to documents prepared for the pension’s investment committee meeting on 7 November.

CalSTRS started co-investing in 1996 and has made more than 90 private equity deals in the strategy to date, the documents show.

Over the last four years the pension took part in 22 private equity co-investment deals totalling $1.1 billion in commitments.

CalSTRS had 45 active co-investments as of the end of June, including ones with Carlyle Group, TA Associates and Blackstone, according to its Private Equity Semi-Annual Snapshot as of 30 June. It also hired AlpInvest Partners as its co-investment advisor in July.

Co-investment contributions have been $3.4 billion; distributions have been $3.4 billion and current remaining value is $1.5 billion, equating to a multiple of invested capital of 1.5x, the documents note.

Co-investments made up approximately 7 percent of CalSTRS’ private equity portfolio. Fund commitments accounted for roughly 93 percent of its exposure as of 30 June, according to its Investment Committee Semi-Annual Activity Report.

Margot Wirth, director of private equity at the pension, told the investment committee at a 20 July meeting she expected the amount of CalSTRS’ co-investments to go up.

“This is something we need to accelerate starting over the next two or three years. We’re basically a 90 percent partnership programme right now, which for a programme our size… it would not be overambitious to go down to 80 percent partnerships and 20 percent co-investments,” she said. “We’ve been thinking about doubling our co-investment rate within the next three years.”

CalSTRS’ PE portfolio made up 8.5 percent or $19.4 billion of its allocation mix for the period ending 30 September, exceeding its 8 percent target for the asset class. The pension has a long-term target of 13 percent for private equity.