CalPERS to pare back private equity target allocation

CalPERS' $31.1 billion private equity program, already the subject of cuts, might experience even more reductions because of the lack of quality investment opportunities, according to an agenda item expected to be approved by the pension fund's investment committee May 19.

The latest move reduces the $289.6 billion California Public Employees' Retirement System's target allocation to 10% as of July 1, from the current 14% target allocation. The reduction to 10% was already planned, but under a new plan, an automatic phase-in program that was to increase the private equity target to 12% by July 1, 2016, will no longer occur.

Sacramento-based CalPERS' actual private equity allocation is currently 10.9%, so achieving the target 12% rate would actually mean an increase in investments, the agenda item shows.

This has caused a debate among CalPERS board members and consultants as to whether a 12% allocation could be achieved by July 1, 2016, even with a gradual phase-in of the new allocation.

Any adjustment in the program after this year would now be subject to an annual review, the agenda material shows, but with no requirement that the allocation would increase.

In a report presented to the investment committee in April, CalPERS consultant Wilshire Associates had said CalPERS investment staff's own models had shown that “it would be virtually impossible” to reach the 12% target selected by the investment committee in February 2014 within two years without a significant decrease in the guidelines for quality private equity investments.

The board agenda material shows that CalPERS investment staff is in agreement with Wilshire as is CalPERS' alternatives consultant Pension Consulting Alliance.

The CalPERS private equity program is one of the largest in the world. CalPERS is already in the process of paring down its hundreds of private equity relationships.

Material from the April investment committee meeting shows that CalPERS would have had to commit $10.5 billion in new private equity investments overall in the next three years to have met the 12% private equity allocation by 2016.