CalSTRS to weigh two PE commitment pacing plans

A lower annual pacing plan would lead to a reduction in co-investment opportunities and preferential treatment from GPs, according to November investment committee documents.

California State Teachers’ Retirement System’s investment committee will review two separate pacing plans for its private equity programme and the impact of each on the proposed new asset allocation and actuarial returns for the overall portfolio, according to documents for the upcoming 6 November meeting.

The investment committee is expected to approve the long-term asset allocation policy targets at the November meeting. Staff will then return with an implementation plan for discussion and an updated policy for review and approval in January 2020. The plan will include the steps to implement the asset allocation so that the private markets asset classes can invest opportunistically in the given market environment, the documents said.

Among the blueprints are projections for private equity target allocations of 13 percent or 10 percent of the total portfolio. CalSTRS staff recommends keeping the target allocation at the current level of 13 percent. However, at the September meeting, deputy chief investment officer Scott Chan proposed a plan to the committee that would analyse the feasibility of achieving the 13 percent target as well as considering a lower 10 percent target.

CalSTRS’ actual exposure to private equity is 9.06 percent against the 13 percent target, according to PEI data. If the pension system maintains its current pace of committing between $7.5 billion and $8 billion to the asset class per year, it will reach the 13 percent target by 2022, according to the portfolio modelling assumptions presented in the meeting documents.

CalSTRS intends to increase its private equity pacing through higher commitments and co-investments with its best-performing managers. The pension system has also added new lower-cost, longer-term private equity strategies to increase the portfolio’s stability and diversification, according to the November meeting documents.

If CalSTRS adopts a private equity target allocation of 10 percent, it will step down its current annual investment pacing to $5 billion. Even so, CalSTRS will be overweight on the asset class until 2029 because of existing managers drawing down on commitments the pension system has already made to date, the presentation said.

What’s more, important GP relationships will need to be recalibrated, which will also lead to reduced co-investment allocations and reduced preferential treatment from GPs, the presentation said.

Reducing the private equity allocation would entail shifting allocation to public equities. To maintain the long-term actuarial investment returns of 7 percent, CalSTRS would further reduce its fixed income allocation and increase overall portfolio risk, the presentation said.

Equities, both private and public, are the largest source of returns for the $240 billion CalSTRS, and the pension system expects private equity to generate long-term returns of 1.5 percent in excess of public equity returns.