An aggressive plan by CalPERS investment officials to ax more than two-thirds of their private equity managers will likely benefit industry giants at the expense of smaller firms, CalPERS officials and consultants say.
The $277.3 billion California Public Employees' Retirement System, Sacramento, is the largest U.S. public pension fund investor in private equity, with more than $31 billion invested and another $10 billion committed, but yet to be deployed, according to Cliffwater LLC, Marina del Rey, Calif., an alternatives investment consultant.
CalPERS officials want to cut to 120 from 389 the number of private equity firms the fund does business with, Real Desrochers, CalPERS senior investment officer, private equity, told the investment committee on Dec. 16. There is no official timetable for the reductions, but CalPERS officials say full implementation could take from five to 10 years.
The plan is to weed out firms with poor investment returns, but performance will not be the only factor, say board members and those familiar with CalPERS' operations.
“In general, larger managers have larger capabilities” and are a better match for the nation's largest defined benefit plan, CalPERS board member J.J. Jelincic said in an interview.
Mr. Jelincic said he doesn't believe larger firms always have more skill than smaller ones, but the bigger managers have the resources to do the large deals. Smaller firms, he said, “don't have the ability to buy up (J.P. Morgan) Chase.”
The largest private equity firms already are the biggest managers of CalPERS private equity assets: Apollo Global Management LLC, Carlyle Group LP, TPG Capital LP, Blackstone Group LP and KKR & Co. LP.
CalPERS has $3.3 billion invested with Apollo or 11% of the private equity allocation; $3 billion invested with Carlyle, 9.5%; $2.1 billion with TPG, 6.8%; $1.4 billion with Blackstone, 4.6%; and $1.1 billion with KKR, 3.5%.
Apollo, with a 20.66% annualized net rate of return, was the only one of the five managers to make CalPERS' top quartile of private equity managers for the 10-year period ended Sept. 30. Carlyle, with a 17.56% annualized net return, and Blackstone, 17.29%, were in the second quartile.
The remaining managers were in the third quartile of CalPERS' private equity managers for the 10-year period, with KKR at 11.64% and TPG, 10.51%.
Among private equity partners managing active funds, Advent International Corp. produced the best results for CalPERS in the 10-year period, with an annualized net return of 35.63%, followed by TowerBrook Capital Partners LP, with 34.34%.
CalPERS assets invested with Advent International totaled $871 million and TowerBrook, $356 million, as of Sept. 30.
But being in the bottom half won't necessarily exclude managers because CalPERS' decision whether to invest in new funds will also take into account the extensive platforms and capabilities of the firms, sources familiar with the pension fund's operations say.