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Pension Funds

CalPERS may move soon on new private equity model

CalPERS staff is expected to come to the board with an agenda item concerning its new private equity investment model in two months, said Henry Jones, investment committee chairman, at Wednesday's board meeting.

According to the timeline shared Monday with the investment committee of the $342 billion California Public Employees' Retirement System, Sacramento, CalPERS, among other things, is working on the partnership terms including ownership, compensation and expenses for the portion of the strategy involving outside entities to be set up by CalPERS. A staff workforce strategic plan is expected to be presented to the investment committee in March.

The idea is to divide the portfolio into four pillars:

  • A fund-of-funds-type portfolio that invests in emerging managers.
  • Investing in commingled funds, the current model.
  • Two direct investment strategies that would be run by the separate entities.

The second pillar, which would invest in commingled funds, is the area where CalPERS staff "have clearly moved in our thinking," said John Cole, senior portfolio manager, who is spearheading the effort to create the new private equity investment model.

Earlier this year, CalPERS had conducted a search for a manager to run the commingled fund strategy but later decided against that approach.

Instead, CalPERS plans to develop a collaborative advisory strategy relationship with an outside firm, agenda materials show. CalPERS staff plans to spend the first six months of 2019 focusing on its commingled fund strategy, which also includes co-investments, separate accounts and secondaries.

CalPERS' thinking has also changed regarding two outside entities it plans to set up, Mr. Cole told the investment committee. Instead of partnerships, CalPERS now expects the companies to be limited liability companies, he said.

After being questioned about the outside entities' exemption from California's open meeting laws, Mr. Cole stressed that CalPERS' status as the entities' sole investor gives the pension fund the same transparency and reporting now required by law for all alternative investment managers.

"Every bit of transparency and reporting that we do on any private asset that we have will be done here," Mr. Cole said.

The fact that CalPERS would be "the sole investor" will give the pension fund influence and insight into the investments made by the two outside entities, he said.

However, during questioning by CalPERS board member Margaret Brown, Mr. Cole acknowledged that CalPERS might not always be the two outside entities' only investor, "keeping the option open and allowing it to be at our sole discretion."

Adding another large investor or two willing to invest with the outside entities on CalPERS' terms would give the two outside entities the ability to make larger investments and share the cost, he said.

"If you're able to compete in scale globally ... that might allow you to access (investments) that you wouldn't otherwise have," Mr. Cole said.