CalSTRS to look beyond core PE

The business plan for 2015-2016 outlines the challenges of decreased PE portfolio value.

As the California State Teachers' Retirement System's (CalSTRS) private equity portfolio decreases in value, the fund that had $19.3 billion of PE assets at the end of March will continue to diversify away from core PE in 2015-2016.

In an investment committee report outlining its plan for the next business year and released ahead of a 9 July meeting, the fund that uses 127 external managers accounting for 92.2 percent of its portfolio will “continue to deploy capital in less-mainstream sectors such as debt related, special situation, energy and emerging markets.”

It will also “increase efforts to promote compliance, transparency and fairness in the relationship between private equity general partners and limited partners.”

However, the fund is facing the devaluation of its PE portfolio on an absolute and relative basis to its other asset classes. This is the result of several factors, according to the report, such as a long-term pattern of GPs returning more capital than they can call and high public equity returns in a multi-year span that raised the value of the overall CalSTRS fund. It also cites a “deliberately cautious investment pace.”

Considering the high accumulations of dry powder currently sitting in the industry, the committee states that it must stay disciplined and “make hard choices” to invest through cycles rather than along with the fundraising cycle.

The retirement system, established in 1988, has partnerships worth $16.9 billion, co-investments of $1.5 billion and $913 million in proactive investment.

About 70 percent of its exposure is in North America and 20 percent in Europe, with the rest concentrated in Asia and emerging markets, according to the report. Its FY 2015-2016 goal for private equity return is 12.3 percent. The PEI Research & Analytics division indicates that the pension fund manages $193.10 billion in assets.