CalPERS’ CIO lays out case for increasing private equity target

CalPERS CIO Yu Ben Meng laid out a case at the fund's investment committee meeting Tuesday detailing why the $354.7 billion pension plan needs to increase its private equity allocation, demonstrating that raising its private equity target to 16% could provide higher overall returns.

Mr. Meng shared a chart with three theoretical portfolios showing that raising private equity to 16% target would increase the total fund's expected return to 7.3%, compared to 7% with the current 8% private equity target allocation and 6.7% with a zero private equity allocation.

The three theoretical portfolios do not hold the allocations to most of the other asset classes constant. For example, global equities has a 50% target in the current portfolio, a 55% weighting in the zero private equity allocation portfolio and a 46% allocation in the 16% private equity target allocation example.

Mr. Meng said that he was using the 16% allocation as an illustration. While not identifying his desired private equity target allocation, Mr. Meng said, "We would like to have as much as we can, as much as our liquidity profile can afford us."

At Tuesday's meeting, private equity consultant Meketa Investment Group reviewed CalPERS $27.8 billion portfolio, noting that it underperformed its new lower benchmark in all periods ended Dec. 31. Private equity earned 12.5% for the one year, below its 13% benchmark; 11.3% for the five years, compared to its 13.2% benchmark; and 11.4% for the 10-years, underperforming its 14.5% benchmark.

CalPERS' $39.9 billion real assets also underperformed its benchmark for all time periods ended Dec. 31, mainly do to underperformance of the asset class' largest component, real estate. Real estate earned 4% for the one-year, below its 7.7% benchmark; 9% for the five years, just under its 5.1% benchmark; and 1.2% for the 10-years underperforming its 7.9% benchmark.

Christy Fields, managing director Pension Consulting Alliance, CalPERS' real asset consultant, told the investment committee that the underperformance with real estate was mostly due to its legacy portfolio. Most of the fund's pre-2008 real estate investments are in the emerging markets with some being land holdings, Ms. Fields said.

California Public Employees' Retirement System, Sacramento, does not provide information on its legacy real estate portfolio, CalPERS spokeswoman Megan White said in an email.