CalPERS could stop investing in private equity if the California Legislature passes a bill banning the fund and CalSTRS from investing in firms that are at least partially owned by sovereign wealth funds whose countries have not signed on to basic human rights treaties and do not generally respect the rights of their citizens, according to a memo about the bill by CalPERS staff posted on the funds website.
Staff at the $240.6 billion California Public Employees Retirement System said the bill, endorsed by the Service Employees International Union, could scare off already jittery private equity firms who worry that having CalPERS as a limited partner will subject the funds to political interference.
If CalPERS loses access to top-quartile private equity funds, the expected returns of the (alternative investment management) program would not justify continuing to invest in the asset class, because the lower expected returns would not compensate CalPERS for the greater level of risk associated with private equity, according to the staff memo, which is to be discussed at the systems board meeting March 17.
About $9 billion of CalPERS $23 billion private equity portfolio is managed by private equity firms that are partly owned by sovereign wealth funds. If CalPERS staff had not invested in those funds, the pension fund would have missed out on $3 billion in revenues, according to the staff memo. Since its 1990 inception through Sept. 30, 2007, the private equity portfolio has brought in $12.6 billion in profits, according to the memo.
Staff recommends the board vote to oppose the bill. The board at the $166.5 billion California State Teachers Retirement System, Sacramento, voted March 6 to oppose the bill, with CalSTRS staff saying it would lead to losses of at least $5.3 billion in revenues over the next five years if passed.
Clark McKinley, spokesman at CalPERS, declined to comment ahead of the board meeting.