CalPERS to launch direct private equity investment unit

These investments will be made by CalPERS Direct, a separate entity that will operate alongside the pension system's existing private equity program that primarily makes fund commitments. CalPERS has exposure to Asia-focused vehicles managed by a range of firms, including Asia Alternatives, Affinity Equity Partners, The Carlyle Group, CDH Investments, KKR, PAG Asia Capital, and TPG Capital.

One of the two new funds will concentrate on late-stage investments in technology, life sciences, and healthcare, while the other will make commitments to established companies. CalPERS Direct is scheduled for launch in the first half of 2019, after final review and approval by the pension system's board, according to a statement.

The $13 billion figure is based on what CalPERS estimates would need to be deployed on an annual basis to achieve a 10% allocation of the overall portfolio. Private equity accounted for $26 billion – or 8% – of the pension system's total assets of $326.4 billion as of June 2017. It was also responsible for $233.8 million of the $513.6 million paid out in net management fees for the year, while delivering $455.1 million in carried interest.

Private equity delivered a 13.9% return on a one-year basis, trailing only the public equity portfolio, which recorded 19.6%. The total fund return was 11.2%. However, private equity is CalPERS' best-performing asset class on a five-year and a 10-year basis, generating 9.3% and 10.6%, respectively.

Consolidation is a common theme across most US pension fund portfolios and CalPERS is no exception. Between 2005 and 2015, the number of GP relationships fell from 275 to 102, and the pension system has previously said it expects to have $30 billion in the asset class deployed with just 30 managers by 2020. This target was set prior to the decision to establish CalPERS Direct.

The motivation is to reduce costs and get more value for the large commitments being made to managers. Teacher Retirement System of Texas' response has been to create partnerships with a handful of GPs that cover multiple asset classes, but the CalPERS Direct model is closer to that pursued by sovereign wealth funds and the leading Canadian pension plans. They prioritize co-investment and increasingly participate individually in late-stage rounds for technology start-ups.

A wider variety of LPs have begun to try and absorb elements of this approach – in Asia, for example, Japan Post Bank and Japan Post Insurance this year established a joint unit that will make direct PE investments, mostly in partnership with GPs – although recruiting investment talent remains a challenge. CalPERS said it would begin discussions with industry professionals about the makeup of the independent advisory boards and management teams for CalPERS Direct.

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• Topics
• LPs
• North America
• California Public Employees' Retirement System (CalPERS)
• Co-investment
• Direct investment