CalPERS' private equity program is shrinking, with $24.6 billion committed to funds and co-investments as of June 30, down from $34.2 billion four years earlier, shows a report from Pension Consulting Alliance, its private equity consultant, for the Nov. 14 investment committee meeting.
PCA cites a number of reasons for the reduction in private equity assets, including:
- fewer commitments were made in the 2009-2011-time period relative to 2006-2008;
- recent sales of partnership interests on the secondary market;
- transparency requirements compressed the universe of acceptable managers, and
- ongoing efforts to curtail the establishment of new manager relationships.
The report found that the $300.5 billion pension fund's private equity portfolio outperformed its policy benchmark over the one- and 20-year periods but underperformed over the three-, five- and 10-year periods.
For the one-year period ended June 30, the private equity program returned 1.7%, compared to its custom benchmark of -0.8%; three years, 10% compared to the benchmark's 10.8%; five years, 9.7% vs. 10.6%; 10 years, 10.2% vs. 12.7%; and 20 years, 11.4% vs. 10.1%. Multiyear returns are annualized.
The report found that private equity was CalPERS best-performing asset class over the 10-year period ended June 30.
The report also showed that the capital-weighted average amount that CalPERS pays in management fees and carried interest for private equity partnerships has been declining over the past three years.
In the fiscal year ended June 30, CalPERS on average paid 1.08% in management fees and 14.55% in carried interest or performance fees. That is down from the 1.13% in management fees and 14.8% in carried interest charges paid in the 2014-2015 fiscal year; the 1.17% in management fees and 15.51% in carried interest paid in the 2013-2014 fiscal year; and the 1.22% in management fees and 16.92% in carried interest for the 2012-2013 fiscal year.
The California Public Employees' Retirement System, Sacramento, was at the center of a controversy over private equity fees after the retirement system first announced in 2015 that it was unable to disclose what it paid in carried interest fees to its general partners.
In November 2015, CalPERS released data showing it had paid more than $3 billion in performance fees since 1990. This helped prompt legislation that was signed into law in September by California Gov. Edmund. G. “Jerry” Brown Jr. requiring CalPERS and CalSTRS to be more transparent in disclosing performance fees.
The private equity review also recommends that CalPERS develop a succession plan for the private equity program's top official, Real Desrochers, managing investment director, who joined CalPERS in 2011. The report does not mention Mr. Desrochers age, but he is an industry veteran whose previous jobs include chief investment officer of the Saudi Arabian Investment Co., Riyadh, and director of alternative investments at the $193.2 billion California State Teachers' Retirement System, West Sacramento.
Megan White, a spokeswoman for CalPERS, said in an e-mail that Mr. Desrochers has no plans to retire, but succession planning is a best practice for the pension fund. Ms. White did not say whether CalPERS has developed or was developing a succession plan. She would also not reveal his age.