CalSTRS further refines PE portfolio mix

The $207bn pension fund is proposing the addition of two new sub asset classes in its private equity portfolio.

The California State Teachers’ Retirement System is changing the makeup of its private equity portfolio, according to materials for its 7 June board meeting.

The Sacramento-based pension fund, which had 8.1 percent of its $206.5 billion assets in private equity as of 30 April, is in the process of revising its private equity investment policy.

The first reading of the review, which occurred at the April board meeting, involved suggestions to create a CalSTRS custom private equity index to replace its State Street private equity index benchmark.

For the second reading on 7 June, CalSTRS staff is proposing the introduction of new sub asset classes to make up the private equity portfolio, according to the materials. The new sub-asset classes are core private equity – which CalSTRS defines as investments with lower risk/reward profiles than typical private equity investments. These would come with potentially longer hold periods and more attractive fee terms – and special mandates, which were not explicitly defined in the materials.

Staff is proposing this new portfolio mix to align it better with the newly created custom benchmark containing a similar breakdown of sub-asset classes, the materials showed.

At the same time, CalSTRS plans to get rid of a separate sub bucket for equity expansion, which the pension describes as long-term minority equity positions similar to later-stage venture capital investments, instead including it within the existing sub asset classes of buyout and venture capital. Other sub asset classes such as debt-related investments will remain unchanged, according to the materials.

For the new mix of categories within private equity, CalSTRS is proposing target allocations of 75 percent to buyouts, 6 percent to venture capital, 15 percent to debt-related investments, 2 percent to core private equity and 2 percent to special mandates, the materials showed. The current target allocations are 75 percent to buyouts, 5 percent to venture capital, 15 percent to debt-related investments and 10 percent to equity expansion.

It is maintaining its geographical target allocation of 75 percent to the US and the rest to non-US.

As of 31 December, CalSTRS’ 10 largest private equity exposures were in TPG Partners V and VI, Blackstone Capital V and VI, Providence Equity VI, Cortec Group Fund V, Permira V, CVC European Equity V, First Reserve Fund XII and BC European Capital IX, according to other meeting materials for 7 June. Those 10 positions had an aggregate market value of $2.9 billion, or 17 percent of CalSTRS’ private equity portfolio, as of 31 December.

Unlike in the materials for the first reading, staff specifically wrote in these documents for the second reading that it recommends the investment committee adopt these policy changes.

A CalSTRS spokesman was not available to comment.