CalSTRS US PE portfolio misses benchmark returns

California State Teachers’ Retirement System (CalSTRS) reported in its first quarter numbers that its private equity program has underperformed its benchmarks in all periods up to 10 years.

Overall, however, since inception the portfolio has outperformed its benchmarks, returning 13.5 percent compared with 12.9 percent for the State Street Private Equity Industry Index and 13.3 percent for CalSTRS custom benchmark.

The CalSTRS Semiannual Private Equity Program Report presented at its board meeting on 2 September said one-year returns in the first quarter were 7.3 percent, three-year returns were 12.4 percent, returns were 12.8 percent for five years and 10.6 percent for the 10-year period, all below the net internal rate of return figures of the State Street benchmark and the custom benchmark.

The pension fund’s US portfolio, which accounts for 78 percent of total portfolio and is dominated by buyouts, returned 9 percent for one year, 13.4 percent for three years, 12.9 percent for five years, 10.1 percent for 10 years and 13.2 percent since inception, underperforming against all benchmarks.

Buyouts accounted for 64.5 percent of CalSTRS total private equity exposure as of 31 March, equivalent to $13.58 billion, down from 66.5 percent a half-year ago. The pension fund is seeking to raise its buyout allocation to 70 percent.

In the six months leading to 31 March, the number of CalSTRS PE partnerships and co-investments dropped to 342 from 347 at 30 September. However, the amount of committed capital increased to $50.3 billion from $48.7 billion. These figures fit with a trend among US pension funds to consolidate the number of its GPs to cut costs.

CalSTRS made 20 new commitments in the first half of 2015 worth $2.42 billion. The biggest investments were $488 million to Blackstone Capital Partners VII and $200 million each to TPG Growth III(A), FCO MA IV and EnCap Energy Capital Fund X.

The market value of its PE investments dropped by $1.4 billion to $20.2 billion, while the total value of investments across its portfolio increased to $63.3 billion from $61.7 billion.

Following the semiannual PE presentation, CalSTRS investment committee discussed accounting and reporting. Director of private equity Margot Wirth wrote to the committee that, for at least 15 years, CalSTRS auditors acknowledged CalSTRS PE program financial reporting to be in accordance with the Government Auditing Standards Board rules.

“Like carried interest, payments are disclosed to a partnership’s limited partners but because they are made by either the partnership or the portfolio company to the general partner they are not typically captured by limited partner accounting systems,” Wirth wrote in the memo.

Citing the complexities of partnership structures and lack of GP fee transparency, Wirth added that it is difficult for LPs to track and monitor such payments. The memo stated that CalSTRS supports the goals of the 13 state treasurers – including California’s John Chiang – who wrote to the Securities Exchange Commission at the end of July calling for increased GP fee transparency and an improvement in industry disclosure practices.