The California Public Employees’ Retirement System, through its Total Fund Investment Policy, has now waded into the private debt world in general and, to some extent, the direct lending space in particular.
This has happened in stages. A year ago, as part of the four-year cycle of its Asset Liability Management Process, the CalPERS board of administration chose a new asset allocation mix to guide its investment portfolio in the near and medium future, looking for a 6.8 percent earnings target, with an expected volatility of 12.1 percent.
The new mix was to include a 5 percent allocation to private debt, up from zero. It also included a 13 percent allocation to private equity, up from 8 percent, as discussed by affiliate title Buyouts.
But first there were rules that had to be implemented in connection with the new allocation. In September 2022, the board met to hear proposals for what a CalPERS spokesperson has called “updates to the policy for private assets that brings it in line with the decision [on allocation] from last year”. The updates concerned such matters as when third-party prudent person opinions (PPOs) must be sought for a given investment programme.
In November, the board approved these proposals, which effectuated the revised version of CalPERS’ “Total Fund Investment Policy”.
Though it is clear that 5 percent of the portfolio is to be allocated to private debt, it is not entirely clear what that will mean. In a 113-page document on its investment policy, CalPERS lays out the private debt policy in fewer than three of those pages (31-33). The press office, asked for specifics, linked to that document and referred to those pages.
Yet those pages are not very forthcoming.
The TFIP says, for example, that the percentage of the private debt allotment that shall consist of direct lending will be somewhere between 20 percent and 100 percent of the allocation. Since 20 percent of 5 percent is 1 percent, arithmetic suggests 1 percent is the minimum amount of direct lending one should expect from CalPERS in the months to come. The amount that shall consist of private structured products will be less than or equal to 25 percent. Other possibilities (speciality lending, liquidity financing and real estate financing) are given similarly unfenced ranges.
Unspecific a must
The TFIP also acknowledges that this is unspecific, but says that it must be, given the nature of “evolving market opportunities”.
During the November meeting, CalPERS director Jose Luis Pacheco asked Nicole Musicco, the chief investment officer, a broad question about the composition of the investment underwriting committee. Her reply included what may have seemed a throwaway comment: but it may also be an important augur for CalPERS’ evolution.
Musicco said, “If we’re looking at an opportunity in private equity, but we happen to have real bench strength sitting in Arnie’s world in fixed income, or sitting in Jean’s world in credit, why wouldn’t we bring that knowledge and insight to bear in the debate?”
Musicco referred there to Arnie Phillips, the head of CalPERS’ global fixed income group, and Jean Hsu, who has generally been described until now as the head of opportunistic strategies. Hsu is now in a position to oversee the evolution of the huge and influential pension fund’s commitment to private debt in general and direct lending more specifically.