"We have a real opportunity to be adding more dollar value-add over time," Ms. Musicco said. "This is really where building up that skill set in direct investing and co-investing is going to make or break our ability to do that," she said.
Whether CalPERS private equity portfolio will continue producing returns at a premium to public equity relies on CalPERS' ability to co-invest and to make direct investments, she said.
"Our ability to generate returns within private equity, there is no mystery in it, it is our ability to do it in a more cost-effective manner," she said.
In the year ended March 31, CalPERS' $193.7 billion public equity portfolio with a -6.3% return underperformed its private equity portfolio which had -4.7% internal rate of return. Private market returns are lagged one quarter.
But it will take 10 years before CalPERS will be able to fully invest directly, Ms. Musicco said.
CalPERS co-investments accounted for 12.2% of its private equity portfolio, amounting to $6.7 billion as of March 31.
CalPERS had $55.1 billion invested in private equity as of March 31, its second largest private markets portfolio behind real estate at $56.8 billion.
CalPERS private equity portfolio underperformed private equity indices due to inconsistent commitments by vintage year and under-allocation to venture capital, said Anton Orlich, managing investment director at the same meeting.
CalPERS plans to allocate roughly 10% of its 13% private equity target allocation, amounting to 1% the overall portfolio, to venture capital, Mr. Orlich said. This allocation should equate to roughly $5 billion in venture capital in five years, he said.
At the same time, CalPERS officials plan to move away from buyout investments, which are "overrepresented" in its private equity portfolio, Mr. Orlich said.
As of March 31, 73% of its private equity portfolio ($40.2 billion) was in buyout with 19% ($10.5 billion) in growth, 4% in opportunistic ($2 billion), 2% in credit ( $1.4 billion) and 1% ($800 million) in venture capital.
That is not to say that CalPERS plans to take capital from buyout and invest it in venture capital, Ms. Musicco said.
The idea is more around "right-sizing" between large buyout, and middle market and sector-focused buyout investments, she said. CalPERS officials expect better returns from middle market and sector-focused private equity firms, Ms. Musicco said.
Last year, CalPERS started a process to diversify its private equity portfolio by adding venture capital and growth equity to its private equity portfolio, Mr. Orlich said.
However, "addressing this issue will take several years," he said. CalPERS officials plan to invest with successful firms that have strategies documented to have "performance persistence," Mr. Orlich said.
"By that we mean a manager that performed in the past will be more likely to outperform in the future," he explained. The downside is that competition to invest with those managers is tough and most of their funds are likely to be oversubscribed, Mr. Orlich said.
"It will take a long time to generate relationships with these managers," he said.
In real assets, CalPERS plans to increase its investment in infrastructure, particularly international infrastructure, said Sarah Corr, managing investment director at the same meeting.
CalPERS had $14.1 billion in infrastructure as of March 31, up from about $5 billion in 2019, she said. CalPERS real asset portfolio also includes $351.4 million in forestland as of March 31.
Most of CalPERS' infrastructure portfolio, around 56%, is in the U.S. The biggest sectors in CalPERS' infrastructure portfolio are transportation accounting for about 36% and power representing about 23%.