Private equity managers are taking advantage of high valuations to exit portfolio company investments and sending a portion of the profits, mostly in cash back to the limited partners. While investors are committing capital to new funds, managers aren't spending that new money because of those same high valuations, he added.
The $306.6 billion California Public Employees' Retirement System, Sacramento, leads the ranking of defined benefit plans among the top 200 with investments in private equity.
But even with that top spot, CalPERS' private equity investments dropped nearly 11% to $25.6 billion during the survey period. CalPERS also is in the first position for buyout assets but is down nearly 9% to $15.2 billion and mezzanine, with assets down 6% to $2 billion. CalPERS is second on P&I's distressed debt list with assets down 11.7%% to $2.7 billion and seventh for venture capital with assets down 20.7% to $1.3 billion.
Cash flows were the culprit. In an email, CalPERS spokeswoman Megan White noted distributions to the nation's largest defined benefit fund exceeded capital calls by $3.1 billion in fiscal year 2016.
CalPERS was not alone. Among the top five defined benefit funds in the ranking of private equity investors, only two — third-ranked Teacher Retirement System of Texas and fifth-ranked New York State Common Retirement Fund — had an increase in private equity assets
The private equity assets of the $133.2 billion Texas Teachers, Austin grew 1.5% to $15.9 billion, while the assets of the $184.5 billion New York State Common Retirement Fund, Albany, were up 2.7% to $14.2 billion.
The private equity portfolio of the $196.4 billion California State Teachers' Retirement System, West Sacramento, dropped 12% to $16.3 billion; and the portfolio of the $111.8 billion Washington State Investment Board, Olympia, dipped 2.2% to $15.8 billion.
Real estate equity and REIT portfolios dropped despite good returns. For the 12 months ended Sept. 30, the NCREIF Property index was up 9.2%; the NCREIF Open-end Diversified Core Equity index returned 10.1%; the FTSE NAREIT All REITs index, 20.6%; and the FTSE NAREIT All Equity REITs index, 20.9%. All figures are gross returns.
Domestic real estate was flat at $226.78 billion while international real estate assets dipped 2.5% to $23.2 billion.
Within equity real estate, timberland assets dropped 3.6% to $10 billion for the year ended Sept. 30, not far off the 3.9% slip revealed in the year-earlier report. By comparison, the NCREIF Timberland Property index returned 3.28% for the 12 months.
The equity real estate asset drop experienced by DB plans in the top 200 also can be explained, at least partially, by a flurry of distributions. Real estate fund managers returned $128 billion in cash while calling only $72 billion in capital in the six months ended June 30, according to London-based alternative investment research firm Preqin.
What's more, investors received the highest amount of distributions in 2015 since 2006, with $212 billion distributions vs. $148 billion in capital called, Preqin data show.
“Real estate managers are selling everything they can that makes sense to sell,” said Nancy I. Lashine, managing partner and founder of New York-based placement agent Park Madison Partners.
Generally, investors are recommitting the capital to new equity real estate funds, she said.
“The seventh year of an economic recovery is not a bad time to raise capital and hopefully be sitting on it in the next downturn, Ms. Lashine said. “Nobody is expecting the level of correction we saw in 2007, 2008 and 2009. But trees don't grow to the sky and there's a sense things might correct at this point.”