Wilshire backs CalPERS’ new PE benchmark proposal

The new benchmark would still apply if private equity, which represents 8% of total assets, is combined with public equity as recently suggested by CalPERS.

Investment consultant Wilshire Associates is backing the adoption of a new private equity benchmark for the California Public Employees’ Retirement System (CalPERS) and said that the revised benchmark would support the proposed combination of private equity and public equity in a growth bucket.

The new private equity benchmark, which would be composed of the FTSE All World, All Capitalisation Index plus a 3 percent return hurdle, would allow CalPERS staff more flexibility in meeting the overall investment goals across the pension system, according to an opinion letter submitted by Colorado-based Wilshire for CalPERS’ 15 May board meeting.

More specifically, this All World All Cap benchmark fits the suggested combination of private and public equities into a single growth bucket, focusing private equity investments on economic growth and allowing room to invest more opportunistically, Wilshire said.

As of 28 February, CalPERS had 8 percent, or $25.7 billion, in private equity.

Last month, CalPERS proposed to combine private and public equities, which would together represent 54 percent of the pension’s total $320 billion portfolio, as reported by Private Equity International.

Given that this embraces a global approach, rather than the existing private equity benchmark, which is divided into 67 percent US and 33 percent non-US, CalPERS could more flexibly deploy capital to “high-conviction investments” , or hold back when returns are expected to be less attractive.

But the new benchmark could change the pension fund’s geographic allocations in private equity investments, according to Wilshire.

“While the US private equity market continues to be more developed than many overseas markets, private equity has evolved into a more global opportunity set,” Wilshire president Andrew Junkin wrote in the opinion letter. “Absent any strong convictions to over- or underweight certain regions, CalPERS’ private equity portfolio would need to evaluate non-US opportunities more significantly than has historically been the case in order to align its geographic exposures with the benchmark.”

Wilshire noted that, while this proposal is not a “radical departure” from the existing benchmark, it defines the way private equity would fit into the overall portfolio for the upcoming Asset Liability Workshop in November, during which the merging of private and public equity will be discussed at greater length.

CalPERS plans to discuss these proposals, along with feedback, at the June board meeting.

A CalPERS spokeswoman was not available to comment.