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Private Equity

Meketa says CalPERS’ new private equity structure misses opportunities, produces challenges

CalPERS' private equity program faces challenges that may impact its ability to meet its goals as a result of recent structural changes, according to an annual review of the program prepared by new private equity consultant Meketa Investment Group for the pension fund's Nov. 13 investment committee meeting.

The $338.8 billion California Public Employees' Retirement System, Sacramento, is in the midst of a multiyear process of reducing its number of private equity managers to 30 by 2020. CalPERS reported the number of managers had been reduced to 99 as of June 30, 2016, the latest date available, from more than 200 in 2015. The review notes that the decision to concentrate commitments to the "core 30" was "intended to reduce complexity and costs of managing the portfolio, help improve investment terms due to CalPERS being a larger investor and allow CalPERS to take advantage of the broad range of investment opportunities (e.g., co-investments and customized accounts) that may be available from certain managers."

In its review, however, Meketa, which succeeded Pension Consulting Alliance as private equity consultant effective March 31, says the program may not realize optimal returns and may not be able to maintain the 8% target to the asset class.

The review says by relying on 30 managers who are concentrated primarily in mega- and large buyout strategies, CalPERS may miss out on better returns from other managers. "Other strategies such as mid and small buyouts, and growth could provide stronger returns as well as strategy and manager diversification," the review said.

The review also said CalPERS has not received meaningful fee reductions that were not available to other limited partners, and the program has shown an inability to deploy the larger commitment amounts it desires to obtain. Also, since co-investment opportunities are not being pursued and discussions regarding separate accounts have not led to commitments, "CalPERS is not fully realizing the opportunities available to partner with the core 30 managers," the review said.

CalPERS had $25.9 billion in private equity as of June 30.

Staff shortages, as well, as a result of the shrinking of the program, contribute their own challenges, the review said. As of Sept. 1, the program had 35 positions, down from 41 as of June 30 and 50 as of June 30, 2016. Also Real Desrochers, managing investment director of the program, departed in April. That reduction comes from transfers to other CalPERS areas and departures, the review said. The structural change of separating investment underwriting from investment monitoring "can lead to confusion by the general partner about whom to contact about a particular matter or opportunity," Meketa said.

The private equity program returned a net 13.9% in the fiscal year ended June 30, falling below its 20.3% policy benchmark. For the three, five and 10 years ended June 30, the program returned an annualized net 8.1%, 11.5% and 9.3%, respectively, below the respective policy benchmarks of 9.9%, 13.7% and 13%. The review notes those returns exceeded the global equity policy benchmarks of 5.5%, 9.2% and 4.9%, respectively.

John Osborn, CalPERS spokesman, declined to comment.