CalPERS is reducing its exposure to large buyouts in its $68 billion private equity portfolio and committing more capital to growth equity and venture capital, according to a board presentation.
Buyouts represented 70% of the portfolio, compared to 20% in growth equity and expansion stage private equity, and 0.9% in venture capital as of Dec. 31, according to a Meketa Investment Group report for the investment committee. Meketa is the private equity, real estate, private debt and infrastructure consultant for the $492.8 billion California Public Employees’ Retirement System, Sacramento.
CalPERS favoring growth and venture over buyouts; active up across fund
Anton Orlich, managing investment director, private equity, said at the investment committee’s March 18 meeting that staff plans to reduce the private equity exposure to buyout to 60% from a historical range of 75% to 80%. Pension fund officials have been committing 60% to buyout and 40% to growth equity and venture capital when the fund began its current strategy in the fall of 2022, compared to about 80% to buyout and 20% to growth equity and venture capital before.
CalPERS officials are also putting a greater portion of its private equity portfolio in co-investments, which have much lower fees than commingled funds, Orlich said. The private equity portfolio had $6.3 billion in co-investments and direct investments as of Dec. 31.
CalPERS' goal is to commit $15 billion to $16 billion to private equity per year, he said. CalPERS committed $3 billion to $5 billion per year on average in 2016 to 2018, according to a private equity report by Meketa for the same investment committee meeting. In 2023, CalPERS committed a total of $20.3 billion to private equity, approximately 47% of capital in no-, or low-fee investment vehicles, the Meketa report said.
Orlich said that lower-cost investment structures will enhance private equity’s return. What’s more, co-investments will help solve the “liquidity puzzle” in which the program commits more than it gets back from private equity managers in distributions, because co-investments in the future would be “self-sustaining” with distributions used to make new commitments, he said.
“So, we are going from a world where we are 85% funds and 15% co-investments with a massive amount of unfunded commitments where the manager could request … capital at any time from us to approximately 50% funds and 50% co-investments where those unfunded commitments go down,” Orlich said.
In June, CalPERS staff will provide a private equity review containing information about the new private equity strategy that began in the fall of 2022, and how in the year since inception the portfolio outperformed the private equity universe. CalPERS' private equity portfolio earned 8.8% for the year ended Dec. 31, underperforming its 22.8% benchmark that is tied to public equity markets. The portfolio outperformed its benchmark in the three, five and 10-year periods.
Separately, CalPERS is moving more of its total assets into actively managed strategies because they “can be a diversifying source of return,” said Dan Bienvenue, interim chief investment officer, at the same investment committee meeting. As of Dec. 31, CalPERS had 54% actively managed assets, up 2 percentage points from the prior year and up significantly from the past three or four years, he said.
CalPERS' $215 billion global public equity portfolio had an average allocation of 16% to active strategies in 2023. Pension fund officials moved 90% of the active management of its $4.6 billion high-yield portfolio to external managers. CalPERS had $26.5 billion in global fixed income including high yield as of Dec. 31.
These moves into active management resulted in actionable tracking error, which quantifies divergence from the policy benchmark, increasing to 15 basis points in 2023 from 10 basis points the prior year. They also resulted in a greater share of pension fund assets managed externally, up to 34% in 2023 from 29% the year before.