CalSTRS’ underserved programme hurts PE performance

The private equity performance at the second-largest US public pension fund has lagged due to a specific mandate that targets niche, underserved sectors and areas in California.

The Underserved Urban & Rural California strategy within the private equity programme of the California State Teachers’ Retirement System (CalSTRS) has been dragging down the performance of the overall private equity portfolio, according to the pension plan.

The $644 million Underserved Urban & Rural California strategy, which focuses on investing in underserved communities in California and which was approved by the CalSTRS investment committee in February 2002, is part of the pension fund’s private equity proactive portfolio that focuses on new and diverse private equity firms.

CalSTRS’ proactive portfolio also includes the $329 million New & Next Generation Managers programme, which focuses on small, niche emerging managers.

According to the Sacramento-based pension’s investment subcommittee meeting material for 12 January, the Underserved Urban & Rural California strategy has had a generally negative impact on the overall private equity portfolio.

It returned 1.68 percent in one year, 6.52 percent in three years and 5.34 percent in five years leading up to 30 June. The performance of CalSTRS’ overall private equity returns was 2.85 percent, 10.3 percent and 10.13 percent for those respective periods.

“The impact of the proactive portfolio has lowered the overall performance of the private equity portfolio,” CalSTRS wrote in the meeting material. “All [of the portfolio’s] underperformance drag can be attributed to the Underserved Urban & Rural portion. The returns from that portion have been about half of the overall private equity portfolio return over the past three and five years.”

The New & Next Generation Managers strategy has performed better than the overall private equity portfolio for all three periods, generating 5.87 percent, 13.08 percent and 10.21 percent returns.

A CalSTRS spokesman told Private Equity International that no decisions were made at the 12 January meeting regarding either the proactive portfolio or the Underserved Urban & Rural California strategy. He said this was the first discussion of the proactive portfolio’s performance, and potential decisions on changes in strategy won’t be made until the June investment committee meeting.

The Underserved Urban & Rural California programme represents about 4 percent of the $16.2 billion private equity portfolio. Together with the New & Next Generation Managers programme, they represent about 6 percent of CalSTRS total private equity portfolio, which is about 8.4 percent of the total pension fund, as of 31 December.

Funds that CalSTRS has committed to within the proactive portfolio include Chicago-based Muller & Monroe Asset Management’s $400 million commingled fund of fund M2 Private Equity Fund of Funds II – to which CalSTRS committed $100 million in April 2014. At the same time, CalSTRS committed $100 million to an existing partnership for the proactive portfolio with Bank of America’s BAML Capital Access Funds Management.

CalSTRS chief investment officer Christopher Ailman said at the time that these two managers are “in the emerging manager space, which unlocks the potential of small managers in their first, second or third institutional funds, and in the underserved areas of California’s urban and rural areas”.

CalSTRS’ private equity investment policy from July 2014 outlines that CalSTRS uses fund of funds managers for the proactive portfolio, with the flexibility to invest directly in funds or make co-investments. CalSTRS has $196.4 billion in assets under management.