CalPERS Chief Investment Officer Theodore Eliopoulos asked the retirement system's senior private equity staff Monday to explore options to change the $299.5 billion pension fund's private equity program, including cutting out general partners and making private equity investments directly.
Mr. Eliopoulos said he was concerned about the small number of top-performing private equity managers, who because of their performance have been able to maintain high fees and are oversubscribed. He said the California Public Employees' Retirement System, Sacramento, might have to come up with alternatives to the general partner/limited partner fund structure.
“It's not a game of chicken,” Mr. Eliopoulos said in his remarks at the pension fund's investment committee meeting in Sacramento, saying CalPERS is not attacking general partners, but rather putting its focus on making its private equity program as cost-effective as possible.
Other options that will be explored include increasing the number of co-investments and increasing the number of separate accounts with general partners, Mr. Eliopoulos said.
In an interview during a break at the meeting, Mr. Eliopoulos stressed that no decisions will be made immediately; a review will take at least several years.
No public pension fund in the U.S. runs its own direct private equity program, but large plans in Canada do.
CalPERS' private equity portfolio is $26.4 billion, with $17.7 billion of that in private equity funds, $3.8 billion in funds of funds, $2.9 billion in separate accounts and $1.8 billion co-investments. The remainder is in currency and distributed securities.
The issue of how much CalPERS pays private equity managers has been a controversy since CalPERS disclosed back in 2015 that it did not know how much it was paying in private equity performance fees.
That disclosure prompted a state law requiring disclosure of fees. Statistics presented at Monday's meeting show CalPERS paid $206.5 million in management fees and $539 million in performance fees to general partners during the fiscal year ended June 30.
CalPERS, which has more than 100 private equity partners, is engaged in a multiyear process to reduce the number of managers to 30.
Private equity is CalPERS' best performing long-term asset class, with a net annualized return of 10% for the three years ended June 30; 9.7% for five years and 10.2% for 10 years, compared to the benchmark's 10.8% 10.6% 12.7%, respectively.