Side Letter: CalPERS’ $17bn PE push; asset class attracting UK’s wealthy; ESG’s litigation risk

Unlike some of its peers, CalPERS has plenty of room for more private equity. Plus: The UK's private wealth party continues unabated; and anti-ESG backlash could be associated with heightened litigation risk. Here’s today's brief, for our valued subscribers only.

Just happened

CalPERS: piling into PE (Source: Getty)

CalPERS’ commitments
At a time when the denominator effect and macroeconomic headwinds have many US public pensions thinking carefully about their private equity pacing, California Public Employees’ Retirement System appears to be something of an anomaly. The $448.4 billion pension made 31 commitments totalling $7.5 billion across funds, co-investments and custom accounts in H2 2022, bringing its annual total to $17 billion across 66 commitments, according to documents prepared for a 13 March investment committee meeting. That compares with $12.3 billion in 2021.

Co-investments and custom accounts made up 64 percent of last year’s commitments by value. The latter included $500 million each to TPG NEXT and GCM Grosvenor Elevate – GP seeding platforms by TPG and GCM Grosvenor that aim to back the “next generation of diverse talent”.

CalPERS has room to spare. The portfolio’s NAV represented 11.4 percent of the total fund, still below the 13 percent allocation target it set in 2021. Its PE holdings were valued at $50.3 billion as of December (reflecting 30 September marks), down $3.1 billion – net of cashflows – from 30 June.

CalPERS’ seemingly insatiable appetite reflects efforts to make up for a “lost decade” that saw it miss out on between $11 billion and $18 billion of returns, chief investment officer Nicole Musicco said at a September investment committee meeting. In recent years, CalPERS has added to its PE investing pedigree with the likes of Alaska Permanent alum Yup Kim; Musicco, a former veteran of Ontario Teachers’ Pension Plan; and, more recently, Anton Orlich, a “direct, decisive and hard-charging” investor who previously led Kaiser Permanente‘s alternatives business.

CalPERS has made no secret of its desire to revamp its PE portfolio; last year’s impressive figures suggest the pension is putting its money where its mouth is.

Piling on the PE pounds
PE’s private wealth push appears to be paying off in the UK. High-net-worth and ultra-high-net-worth individuals invested £2.64 billion ($3.2 billion; €3 billion) into the asset class last year, according to research by investment platform Growthdeck.

“A growing number of wealthy individuals recognise the high-return opportunity from PE deals, but also the sense of accomplishment they can get from helping a business expand,” Ian Zant-Boer, CEO of Growthdeck, said in a statement. According to data from the British Private Equity and Venture Capital Association, PE has generated average returns of 17.5 percent per year for assets held for 10 years to 2021, compared with 7.7 percent for the FTSE All-Share Index.

Last year, UK-based law firm Boodle Hatfield reported that UK PE activity by high-net-worth individuals had jumped to the highest figure in a decade, reaching £2.3 billion by the end of 2021. This was compared with £1.2 billion recorded a year prior. Though the two firms may use different metrics in their research, the results nonetheless reflect a trend of UK-based high-net-worth individuals showing increased interest in the asset class in the face of struggling public markets.

As PEI explored last week, PE still has significant work to do in expanding awareness of the asset class among this investor group. These latest results, however, are a timely reminder that the industry is making positive inroads.


A second look
Secondaries activity dipped 20 percent last year from a record high in 2021. That’s according to Campbell Lutyens‘ 2023 Secondary Market Overview. Here are some of the report’s key findings, as reported by our colleagues at Secondaries Investor (registration required):

  • LP-led transactions made up 49 percent of the $106 billion of secondaries volumes last year; GP-led deals represented 40 percent; and preferred equity and direct secondaries made up 10 percent and 1 percent, respectively.
  • Some 80 percent of GP-led positions were priced at 90 percent of NAV or better, down from 93 percent of transactions pricing at the same range in 2021.
  • Just 38 percent of LP-led transactions priced at 90 percent of NAV or better, compared with 78 percent of transactions in 2021.
  • Despite buyers suggesting they would seek diversified exposure in GP-led transactions, single-asset secondaries outpaced multi-asset continuation funds, with deals totalling $21 billion versus $18.5 billion respectively.
  • For the third year in a row, mega-buyouts and mid-market buyouts accounted for at least two-thirds of the funds sold in the secondaries market.

ESG’s greatest risk

ESG is a growing litigation risk, our colleagues at Regulatory Compliance Watch report (registration required). This is among a series of predictions made by law firm Seyfarth in its latest Commercial Litigation Outlook report, which highlighted SEC regulation, Federal Trade Commission cases, anti-ESG legislation and shareholder class-action lawsuits as key risks.

“Organisations that are striving to develop ESG priorities and programmes with attendant promises, goals and other disclosures nevertheless may need to defend against private lawsuits attempting to advance new and novel legal theories,” the report warns. “The SEC’s intensified rulemaking and its initiation of multiple ESG-related actions in 2022 foreshadow increased enforcement activity in 2023.”

The report doesn’t focus exclusively on private fund advisers, but it does include them. Seyfarth partner Chris Robertson told RCW that firms have “an ongoing obligation to make sure whatever disclosures are out there are accurate”, even as market conditions require a change in investment philosophy. “If you correct those prior statements, you’re increasing your risk of a challenge to what you said previously. If you don’t change it, that’s a huge risk that only increases the longer you stay silent.”

Today’s letter was prepared by Alex Lynn with Carmela Mendoza, Helen de Beer and Madeleine Farman.