CalSTRS may face uphill climb in directs build-out

The California State Teachers’ Retirement System has proposed more than tripling its direct investing team to bolster co-investment activity.

The $215 billion public pension fund plans to double its co-investment capacity over the next two to five years to boost performance and familiarise itself with directs, according to documents prepared for its 30 January investment committee meeting.

CalSTRS has invested $6 billion to $7 billion in new commitments annually over the past two years, of which approximately 8 percent to 9 percent were co-investments.

CalSTRS’ five-strong directs team – less than a third the size of its partnership team – is already operating at or near capacity. It has proposed hiring an additional eight investment selection specialists and another four operations specialists for the former, the documents show.

The Sacramento-headquartered fund has identified the Bay Area as an “obvious choice to consider” for its enhanced team. It pointed to the presence of KKR, TPG and Francisco Partners in the area as a clear draw, and noted that several other major LPs, including Government of Singapore Investment Corporation and Australian’s Queensland Investment Corporation, also have staff there.

Hiring for public pensions has never been harder. An unfunded liabilities crisis, low unemployment rates and the rampant expansion of well-paying private asset managers have combined to diminish the appeal of working for a public institution.

Compensation can sometimes be an issue – at least 80 percent of corporate pension funds offer performance-related compensation, compared with 41 percent of public pensions, according to Coller Capital’s Private Equity Barometer Summer 2018.

CalSTRS has recognised the need to remain competitive. The fund “believes that the competition for high quality co-investment professionals makes it advisable to budget for a higher average salary for such professionals vis-à-vis private equity professionals in general,” the investment committee documents noted.

Competition may come from its own backyard. The California Public Employees’ Retirement System, the US’s largest public pension, will seek to invest $10 billion directly in up to 10 consumer or industrial businesses through its new “Horizon” programme and the same amount in late-stage venture capital companies through the “Innovation” scheme.

The fund is in talks with Silver Lake co-founder David Roux and senior adviser Adam Grosser to lead the two teams respectively.

Building a co-investment team is also one of the top priorities for New York City Public Pension Funds, its head of private equity David Enriquez told Private Equity International on Thursday.

CalSTRS’ performance sheds light on why public institutions are betting big on directs. Its co-investments had generated a 27.3 percent one-year return as of 31 March – the most recent available data – compared with 14.2 percent for its fund commitments. Co-investments outperformed the latter by 3.8 percent on a three-year basis and 1.7 percent over five years.