News & analysis CALPERS TARGETS PRIVATE EQUITY INCREASE
The US pension plan looks to private companies to boost its returns and long-term funding position, finds Andrew Holt.
The US’ largest public pension plan – the $456bn (£368bn) California Public Employees’ Retirement System (CalPERS) – is to increase its allocation to private equity. The move comes after former Border to Coast chief investment officer Daniel Booth was recruited as deputy chief investment officer for private markets in April. CalPERS, which is already one of the world’s biggest private equity investors, has confirmed that it is undertaking an exten- sive review of its holdings with the intention of expanding its $52bn (£42bn) private equity portfolio. Chief executive Marcie Frost said from an investor’s viewpoint there is an appetite to put “more money into private equity”. It comes on the back of an announcement in January, when CalPERS said it was increasing its allocation to private equity to 13% from 8%, which began with the 2022-23 fiscal year. CalPERS also made a $1bn (£808m) commitment to identify and support the next generation of investor entrepreneurs in the private markets sector. “CalPERS is committed to giving access and opportunity to new and innovative talent in the investment industry,” CalP- ERS chief investment officer Nicole Musicco said. “We want to create and nurture an ecosystem that will serve as a catalyst to seed the next generation of diverse talent and foster different ways of seeing and solving problems.”
Inflation protection
Private equity is key to the scheme’s prosperity. “Efficient implementation of private assets will be key to achieving the returns needed to grow the fund and improve our long-term funding position,” Booth said. He added that private markets continue to provide inflation protection and diversification, as well as the excess returns CalPERS needs to meet its pension obligations. Private equity is the highest performing asset class in the CalP- ERS portfolio returning 13% during the past five years and 12.8% over a decade. Overall, the CalPERS portfolio earned 3.3% for the year ending March 31, an annualised 6.9% over 10 years and 7.5% for 20 years of exposure. This move by CalPERS comes at a time when returns from pri- vate equity have been questioned. But Frost is unfazed, noting that despite this, she and CalPERS are confident in the process they are undertaking. Some opportunities exist in private equity following the col- lapse of Silicon Valley Bank, she said, adding that the fund is ready to deal with the risk to gain from such a situation.
This comes after a mini-bank wobble which saw Signature Bank and First Republic in the US go under and Swiss lender Credit Suisse swallowed up by rival UBS. This, for Frost, is an environment full of opportunity. “We have liquidity, we have a lot of dry powder that we can put to use,” she said.
Indeed, it could well prove a good time for some investors to increase their private equity allocation. Some of the best per- forming private equity returns were generated after the dotcom crash and again after the global financial crisis, according to data from PitchBook. CalPERS’ bullishness for private equity comes after last year’s revelation from Musicco that a decision to freeze its private equity programme between 2009 and 2018 had cost the pen- sion plan an estimated $18bn (£14.5bn) in returns. Musicco said its move in January was a greater commitment to private equity, which now offered a game-changing approach. “We welcome and encourage other global allocators to join us in this effort and reimagine the traditional and structural dynamics in the markets,” she added. Furthermore, Frost said CalPERS is eager to make further new investments into private equity, rather than using external managers.
Broader trend For all the opportunities offered by private equity, it appears CalPERS is breaking with a broader trend.
When looked at as a wider movement, pension funds world- wide fell slightly short of meeting their private equity alloca- tion targets in the first quarter, due it seems, to uncertain mac- ro-economic conditions affecting institutional investment decisions, according to S&P Global Market Intelligence. Among 365 global pension funds, the median allocation to pri- vate equity was $276m (£222.4m), compared with a median target allocation of $280m (£225.6m). Investor hesitancy, according to S&P, was due to the uncertain direction of inflation and interest rates and the ‘denominator effect,’ which overexposed some institutional investors to pri- vate equity as public markets fell.
“Whether the slight under allocation represents a temporary adjustment to the current investment environment or the beginning of an allocation reassessment remains to be seen,” S&P said.
The under allocation can be attributed to other factors. There was, for instance, a relative dearth of private equity and venture capital funds launched during the first three months of this year, compared to the same period a year earlier. Only 30 funds launched worldwide during the first quarter raised more than $100m (£80.5m), down from 450 during the opening three months of 2022.
Issue 124 June 2023 | portfolio institutional | 7
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56
