CalPERS Chief Investment Officer Theodore Eliopoulos wants to boost returns by starting a direct investment program in private equity or finding another alternative to the traditional limited partner model, but the road ahead won't be smooth for the largest U.S. defined benefit plan.
The CIO of the $333.3 billion California Public Employees' Retirement System would face hurdles that would make it difficult to implement a direct investment program, say private equity and pension experts.
Competing on salaries for top talent against private-sector asset managers is considered the biggest challenge. How the program would be set up and whether it would answer to trustees is another challenge, experts and board members said.
If the direct-investment plan moves forward, Sacramento-based CalPERS would be taking a page from its Canadian peers, which started making direct private equity investments in the 1990s, pension experts said. CalPERS officials, who discussed the idea at a July 17 board meeting, plan to issue a more details about the direct investment program in six months.
Direct investing would reduce some of the approximately $800 million in fees CalPERS pays annually to private equity managers. But the size of the reduction is unclear because Mr. Eliopoulos said CalPERS would continue to participate in some private equity funds as a limited partner.
Private equity is CalPERS' best-performing asset class over the 10- and 20-year investment periods. But the fund's program shrunk to $26.2 billion as of May 31 from $34 billion four years earlier because of the difficulty private equity firms are having in finding suitable investments.
"There is a lot of competition," Mr. Eliopoulos said in a July interview, noting the large number of investors seeking available opportunities in commingled private equity funds.
In private equity, CalPERS expects to earn an annual net return of 8.2% over the next decade. By comparison, on a net annualized basis CalPERS private equity program earned 8% for three years; 11.4% for five years; 8.9% for 10 years and 11.3% for 20 years.
Another option — never done before by a public pension plan — would be to outsource much or all CalPERS private equity program to a money manager that could potentially leverage better deals with private equity managers than CalPERS staff. Sources say Mr. Eliopoulos has talked to BlackRock Inc. about possibly taking over all or part of CalPERS private equity program. BlackRock is the world's largest asset manager with more than $5 trillion in assets under management, but its private equity program is a relatively small part of its business, a fund of funds with $21.5 billion in assets under management.
A CalPERS spokesman said Mr. Eliopoulos would be unavailable for comment. Mr. Eliopoulos was scheduled to update the investment committee in closed session on Sept. 18 on his staff's research on alternatives to CalPERS' current private equity model. Sources say they expect Mr. Eliopoulos to offer more information on the potential deal with BlackRock.