CalPERS CIO: Private debt should be in our portfolio

The California pension plan has made mezzanine and distressed debt commitments in the past but not direct lending.

The California Public Employees’ Retirement System may soon be the new kid on the block in the direct lending world, an asset class the $396 billion pension fund has yet to enter.

The Sacramento, California-based retirement plan is the largest public pension private equity investor in the US, but it has yet to make a single allocation to direct lending. At a private markets workshop at the pension fund’s December meeting, chief investment officer Ben Meng supported the idea of adding private debt exposure.

“I think [private debt is] something we overlooked in the past, particularly given the changes in regulation after the global financial crisis,” he said, according to a transcript of the meeting. “Private debt…has grown very rapidly. So currently, it’s not in our portfolio. We think it should be.”

CalPERS has made investments in mezzanine debt as well as distressed debt and special situations out of its private equity portfolio. GSO Capital Partners has been the beneficiary of $1.75 billion of that money – $750 million to distressed debt, $650 million to energy credit and $350 million to mezzanine funds. The firm also committed $1.8 billion to the Blackstone Tactical Opportunities fund series, which invests in both debt and equity.

Apollo Global Management, KPS Capital Partners and Avenue Capital Group are among the other distressed debt and special situations managers managing CalPERS money, though those firms have only received commitments pre-global financial crisis or in its immediate aftermath. Among the more recent investments are to Clearlake Capital Partners, which has received four commitments from CalPERS since 2012.

CalPERS has been revamping its private equity approach in recent months, with preparations to add co-investments to its book, and adjustments made to alter its definition of “customised investment account” to give the pension fund more latitude when making initial decisions on potential investments.