Perspectives 2018 North America: CalPERS rethinks its ‘core 30’ concept

The California Public Employees’ Retirement System‘s 2011 plan to reduce the list of its core private equity managers has failed to deliver intended improvements, according to Monday’s investment committee meeting.

CalPERS’ so-called ‘core 30’ is the pension plan’s list of private equity managers that was formed as part of a five-year strategic programme to reduce complexity and the cost of managing the portfolio. It was intended to allow CalPERS to take advantage of a broad range of investment opportunities such as co-investments and customised accounts.

However, some of these goals have not materialised, prompting questions around the future of the core 30 from CalPERS’ PE consultant Meketa Investment Group and some of its board members.

Meketa noted in its annual review that portfolio complexity and monitoring intensity as measured by the number of capital transactions and amendment requests has not diminished. It also pointed said CalPERS “has not benefited from meaningful fee reductions that were not available to similarly situated limited partners”.

In addition, CalPERS has not been pursuing co-investment opportunities and discussions about separate accounts have not led to commitments. It has also struggled in deploying larger amounts of capital with fewer managers as planned.

“We’re not seeing the kind of partnership opportunities where there’s co-investments and separate accounts that can be taken advantage of,” Steven Hartt, a principal with Meketa, told the CalPERS’ board members during Monday’s meeting.

“In some cases, it might be a little of how a number of these large managers tend to want to do their partnership activities. What I mean is there can be groups like Blackstone or Carlyle that look to do partnership activities across a number of asset classes as opposed to just private equity and working with CalPERS to do those kinds of activities across multiple asset classes can be a little complex.”

Meketa’s mixed review of CalPERS’ core 30 prompted several questions from board members.

Betty Yee, California’s state controller, asked whether the concept should be dropped or whether CalPERS could expand the list.

Hartt replied that the investment staff has a process to alter the list and has considered other managers. “From what I’ve heard from staff more recently is that they would look to have some more than just 30 managers on their list,” he said. “I don’t think there’s been a decision as to exactly how many, but I know that other plans do have a larger set.”

Priya Mathur, a board member, asked Hartt what he considers the right level of concentration versus diversification in the PE portfolio of very large and smaller buyout funds. “Do you have a sense of what that sweet spot might be for an organisation of our size?” she asked.

Hartt said that Meketa and the investment staff need to do some more research to come up with an answer, but he also said that commitments to small buyout firms wouldn’t move the needle much unless there were hundreds done.

If CalPERS decides to take advantage of co-investments it should ensure its private equity underwriting team gains experience in the field, Hartt added.

“In terms of staffing to be able to execute that, what I have seen now is that there are just a few members of the team, the underwriting team, that have experience in doing co-investments,” he said. “I would think that in order to do more co-investments that more staff should be able to have experience in doing that, whether that is a training and mentorship programme within CalPERS, whether it’s going out to other groups, lots of different ways to do that.”

The board asked Meketa and CalPERS’ investment staff to study possibilities to refine its core 30 list and assess its ideal size.

CalPERS’ net asset value for its private equity portfolio was $25.9 billion as of 30 June.