CalSTRS updated the private equity investment policy for its $53 billion portfolio on Sept. 25, delineating the use of total portfolio leverage in the asset class and requiring an independent fiduciary to verify price on co-investments greater than $250 million.
In January, the investment committee of the $346.5 billion California State Teachers' Retirement System, West Sacramento, approved its ability to temporarily leverage the entire portfolio by up to 10% to smooth out cash flows and to rebalance the portfolio.
The revised policy gives private equity staff flexibility to draw on the total fund leverage to enhance investment returns and manage liquidity. Before the change, CalSTRS private equity investment policy had been silent on the use of leverage.
The board’s private equity investment consultant, Meketa Investment Group, noted in a memo to the committee that there is no explicit maximum leverage limit for private equity, but rather, the leverage limit will be measured at the total fund level.
In her presentation to CalSTRS investment committee, Margot Wirth, director of private equity, said that the requirement of an independent fiduciary opinion for all co-investments was put in place a couple of decades ago when the pension fund had done two or three co-investments, had no dedicated co-investment team and had not embarked on the collaborative model.
Today, CalSTRS private equity has completed a couple of hundred co-investments and has “a world class team now,” Wirth said.
"It's time to take off the training wheels," she said.
Co-investments, now represent approximately 22% of the private equity portfolio, according to a Meketa report to the committee.
CalSTRS has slowed its pace of commitments to private equity with a $4 billion to $4.5 billion expected to be committed in 2024, said John A. Haggerty, Meketa's managing principal and director of private market investments, at the same meeting.
By comparison, CalSTRS committed $3.6 billion in 2023, $7.1 billion in 2022 and $9.4 billion in 2021. CalSTRS is continuing to slow its commitment pacing to reflect portfolio and market dynamics, according to a report to the committee.
Real estate
Separately, CalSTRS real estate team is focusing its $47.3 billion portfolio on property types that benefited from changes in the markets such as industrial, said Julie Donegan, CalSTRS real estate investment director, at the same meeting.
CalSTRS’ real estate portfolio continues to be underweight industrial and multifamily by 12% and 10%, respectively, according to a report for the committee by its real estate consultant RCLCO Fund Advisors.
CalSTRS is also leaning into the residential segment including single family rentals and affordable housing as well as necessity-based retail, Donegan said.
There is still demand for necessity-based spaces as people are still going to shopping centers to get their haircut or go to the gym, she said.
Retail has taken its lumps and has gone out the other side, Donegan said.
CalSTRS real estate portfolio is also overweight office properties, RCLCO reported. But its office exposure decreased by 192 basis points over the past six months, leaving the portfolio 7% overweight to office.
Much of the overweight is due to the portfolio’s exposure to life science buildings, said Ben Maslan is a managing director with RCLCO Fund Advisors at the meeting. Stripping out life science, the real estate portfolio’s exposure to office is in line with its benchmark, he said.
