CalPERS investment staff over the next five years plans to wind down a $1.035 billion private equity initiative designed to invest in California companies, particularly those in economically disadvantaged areas where obtaining institutional capital has been a challenge, according to a review of the pension fund's private equity program.
The review was released online in conjunction with an agenda item for the $237.5 billion California Public Employees' Retirement System's Aug. 13 investment committee meeting. The wind-down does not require a committee vote.
The most recent commitment in the program, $560 million to a fund of funds managed by Hamilton Lane in 2006 has shown an internal rate of return of 0.86% as of Dec. 31 compared to its benchmark's 6.9% return.
Another $475 million committed to 10 managers in 2001 has shown a -6.4% IRR as of the end of last year when the very strong performance of one of the funds — the GCP California Fund, which had an IRR of 94% — was excluded, the review said. That fund's performance is “most likely not repeatable,” the review said.
The wind-down is bound to cause controversy in financially troubled California as legislators and state officials have been pushing the Sacramento-based pension fund to increase investment opportunities in the state.
While the program has produced intended secondary benefits of economic development in depressed California markets — 41% of companies are located in areas traditionally underserved by institutional capital and 55% of employees live in economically disadvantaged areas — “the California Initiative has not met CalPERS investment return expectations,” the review says.
“The thesis for continued investment in a targeted CA Initiative Program would need to be carefully evaluated relative to the benefits gained before any additional capital is committed to another CA program,” the review said.
CalPERS has several other in-state programs that would not be affected by the wind-down of the California private equity initiative.
CalPERS currently has more than $23 billion invested in California across all asset classes, CalPERS spokesman Brad Pacheco said in a statement. He said the California initiative has served as a good foundation for continued investment in the state.
“Based on the continuing results of the CA Initiative, CalPERS will be able to better target future investments,” he said in the statement.
“We gained greater insight and experiences investing in the California through the program and that will help us identify future opportunities to fulfill our commitment to investing in the state,” Mr. Pacheco wrote in a follow-up e-mail.
The review also looked at CalPERS' overall private equity and expressed concern about the retirement system's $11.5 billion of unfunded commitments. The review warns that CalPERS' average hold period for private equity investments is at a record level — 4.8 years, a 33% increase from 2007 — and “could challenge returns if holding periods continue to be protracted.” Overall, CalPERS has $45.7 billion allocated to private equity.
Buyout funds remain CalPERS' biggest private equity strategy and have been the primary driver of returns, the review shows. The net asset value of funded buyout commitments as of June 30 is $19.4 billion, with one-year returns of 6.8%, three-year annualzed returns of 18.5% and five-year annualized returns of 8%, the review noted.
In contrast, total, which includes buyout, private equity investments returns, as of June 30, were 5.4% for the one-year period, 20.7% for the three-year period and 7.2% for the five-year period. Multiyear returns are annualized.