CalPERS adopts new private equity policy, changes staff discretion on commitments

CalPERS' investment committee approved a new private equity investment policy on Monday that expands staff's discretion to make some investments and eliminates all reference to direct investments except for co-investments.

The new wording removes all references to direct investments, including staff's delegated authority over direct investments. However, staff still has some authority over co-investments. The $359.3 billion California Public Employees' Retirement System, Sacramento, is currently considering whether to establish a new model for making direct investments that would include creating a separate corporation with its own investment staff. Should this change be adopted, staff would return to the investment committee to modify the investment policy statement, a staff report noted.

The new policy also trims the number of private equity categories and provides new limits to staff's authority to make investments without investment committee approval for each of the new category. For instance, the former version of the policy indicates that the staff had specific authority limits for top-quartile managers, second-quartile managers, emerging manager teams, co-investments and secondary market managers. The new version eliminates quartile distinctions and combines top-quartile managers, second-quartile managers and emerging managers into a single "fund" category with a uniform investment limit for staff. Under the former investment policy statement, staff could make larger investments in top-quartile private equity funds, 4% of the private equity portfolio, than to second-quartile and emerging manager funds, which were limited to 0.75% of the portfolio. The new policy gives the managing investment director discretion to invest up to $500 million and the chief investment officer discretion to commit up to $1 billion in a top-quartile, second-quartile or emerging manager fund. The managing investment director has a fiscal-year limit for fund commitments of $10 billion. The CIO does not have a fiscal-year limit.

The policy also has new discretionary investment limits for co-investments, customized investment accounts and investments on the private equity secondary market. The managing investment director can commit up to $300 million in a co-investment, $1.3 billion in a customized investment account and $900 million to secondaries. The managing investment director's fiscal-year commitment limit is $3 billion to co-investments, $5 billion to customized investment accounts and $3 billion to secondaries. The CIO's discretion is up to $600 million per co-investment, $1.9 billion per customized investment account and $1.7 billion for a secondary investment.

Previously, the managing investment director had discretion to commit up to 0.75% of the private equity portfolio to co-investments, 3% to customized accounts and 2% to secondaries, as well as 0.5% to direct investments. The CIO's prior discretion was 1.5% to co-investments, 4.5% to customized accounts, 4% to secondaries and 0.5% to direct investments.

Currently, the private equity target allocation is 8%, with a 7.7% actual allocation.

The new policy also increase CalPERS' suballocation to buyouts to 65% from 60% of the private equity portfolio and decreases credit-related investments to 10% from 15%. It retains suballocations of growth/expansion at 15%, opportunistic at 10% and venture capital at 1%.

Separately, the investment committee put off a decision on whether to align all of its investment consultant contracts so that they all expire on June 30, 2020, to another meeting no later than the January offsite meeting. The investment committee tabled the decision to give it time to discuss the roles and number of investment consultants CalPERS would retain in the future.

CalPERS staff had proposed extending by one year the contracts of its general investment, forestry, private equity and infrastructure consultants, and reducing its real estate consultant's contract, which is now scheduled to end on March 31, 2022. The fund's general investment and forestry consultant is Wilshire Associates; private equity and infrastructure consultant, Meketa Investment Group; and real estate consultant, Pension Consulting Alliance.

During the discussion, Betty T. Yee, California state controller and CalPERS board member, and Margaret Brown, board member, both said they preferred having multiple investment consultants.

"I think multiple perspectives just helps better inform us," Ms. Yee said.