CalSTRS to expand co-investments, separate accounts

The $154bn pension system will review a private equity business plan next week that shows a focus on reducing costs by creating separate accounts and expanding the co-investment programme.

The California State Teachers’ Retirement System plans to improve its private equity co-investment capabilities over the next fiscal year as well as work with managers on creating separate accounts as a way to reduce fees, according to the pension’s fiscal 2011-2012 business plan.

The $154 billion pension’s board will review the business plan next week. The system has separate plans for private equity, real estate and infrastructure.

The plan doesn’t include how much the pension system plans to spend on private equity or real estate over the next 12 months. Investment staff is in the process of creating a two-to four-year investment plan that will “map out tentative investment amounts in the portfolio’s various strategies and geographies”, according to pension documents.

Goals going forward

Key initiatives in fiscal 2011-2012 for the pension’s $22.5 billion private equity programme include completing a request for proposal process for a private equity consultant. The pension’s current consultant, Pension Consulting Alliance’s, contract expires 30 June, 2012. Another goal will be to add two professional staff members to the private equity team, one for the investment group and one for back office responsibilities.

The pension also will work with GPs to find ways to reduce costs by creating separate accounts, as well as bolstering its capabilities around co-investing by “cross-training” private equity investment team members who normally focus on committing to private equity funds.

Reducing fees has been one of the pension's recent focuses. Christopher Ailman, the system’s chief investment officer, presented a report earlier this year showing that, across all asset classes, the pension had spent $169.4 million on external asset management in 2010, including management fees, investment consultants, independent fiduciary fees and market data services. The pension has been conducting a review of internal versus external management costs with the possible result that more assets will be managed internally.

The private equity business plan also shows that the pension will slow down its commitment pace in its credit investment programme, which is housed within the private equity programme. The pension is content with its current credit exposure, which is largely in the form of distressed debt, though it is on the lookout for new opportunities as the markets are still uncertain and “a lot of debt needs to be restructured”, according to a person with knowledge of the situation.

Infrastructure initiatives

CalSTRS’ board will also review the pension system’s real assets business plan, which includes infrastructure. The pension will target $300 million to $600 million of new investments in infrastructure for the fiscal year and will also conduct a search for infrastructure consultants.

Investment staff will look for infrastructure assets that are “mature, have low capital expenditures and have an early cash flow (short J curve).” These types of assets “will be preferred as [they] tend to have lower risks while providing the stable returns and cash flows to the programme and the overall fund”, the pension said in documents.

Real estate plans

The pension’s $18.7 billion real estate programme will continue working to increase holdings in core assets and decrease holdings in opportunistic and value-add investments, as well as reduce leverage in the portfolio.

“We have been actively pursuing core industrial and retail and been very selective in considering new office product. The most significant market shift in our industry has been a high demand for investments in core assets. This has been driving up asking prices for core product to a level where we are concerned some markets have a mini-bubble in pricing,” according to pension documents.

“We continue to bid on these assets but are striving to stay disciplined and avoid overpaying in the near term to achieve our long-term objectives,” the pension said. 

CalSTRS will likely complete its selection of core managers this summer to “both purchase core assets through separate account relationships and oversee joint venture partner relationships for both core and value-add strategies”, the pension said in documents.

Once the managers are chosen, the pension also will issue an RFP to “replenish the pool of independent fiduciaries …to opine on new investment opportunities and relationships”.

Also, the pension is exploring creating a “master line of credit” for use by its joint venture partners, to replace individual lines of credit formed with each joint venture, helping to lower leverage in the portfolio.