Public, private equities drive strong returns for California pension funds
America’s two largest public pension funds each reported annual returns in excess of 18% largely driven by soaring domestic and international public equities, although private equity was the second-best performing asset class. `
The California Public Employees' Retirement System (CalPERS) posted a return of 18.4% - the fourth time it has reached double-digit territory in five years - as total assets surpassed $300 billion for the 12 months ended June 2014. Its public equity portfolio gained 24.8%, followed by private equity on 20%, real assets on 13.4%.
The California State Teachers' Retirement System (CalSTRS), which now has a portfolio worth $189.1 billion, posted similar numbers. A headline return of 18.66% for the year ended June 2014 was underpinned by strong global equities and private equity performance, with the asset classes posting gains of 24.73% and 19.61%, respectively. The real estate return was 14.52%.
CalPERS had 10.7% of its assets - or $31 billion - invested private equity as of April 2014, against an interim strategic target of 14%. The allocation for real assets, including real estate, was 9.8%. The pension fund announced earlier this year that it would reduce its target for private equity from 14% to 12% as part of a broader effort to lower investment risk.
Based on the current funding level of 76%, the fund needs a long-term annual return of at least 7.5% to cover current and future payouts.
CalPERS launched a strategic reorientation of its program in 2011 with a view to focusing on a smaller number of managers. Between September 2011 and December 2013, the number of GP relationships fell from 398 to 389, while the number of PE funds receiving commitments dropped from 762 to 741. It has been said the ultimate goal is to reduce the number of managers to around 120.
The pension fund's Asia-focused private equity exposure as of year-end 2013 included funds managed by Affinity Equity Partners, Apollo Global Management, Avenue Capital, The Carlyle Group, Clearwater Capital Partners, GGV Capital, KKR, Lombard, TPG Capital, PAG and SAIF Partners. The pension fund also works with Asia Alternatives, investing in fund-of-funds and through several dedicated vehicles.
As of June, 11.5% of CalSTRS' assets were in private equity against a target allocation of 13%. PE relationships in Asia include Affinity, Bain Capital, CVC Capital Partners, FountainVest Partners, GGV, Hony Capital, Navis Capital Partners, TPG Capital and PAG.
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