CalPERS may need to up its commitment pace

Some board members asked whether it is reducing the investment opportunity set by consolidating its roster of managers.

The California Public Employees’ Retirement System private equity portfolio, which includes private credit, may become under-allocated if it continues its current commitment pace, Private Debt Investor's sister publication Private Equity International reported.

CalPERS is currently on target at 8 percent for its private equity programme, according to its investment consultant Meketa Investment Group. “That being said, we would expect the allocation is going to shrink unless there’s additional capital deployed in private equity,” said Steven Hartt, a principal at Meketa, during an investment board meeting on Monday.

The pension committed $1.6 billion in the first six months of the 2017 calendar year and $2.9 billion in the fiscal year ended 30 June. 

Some of the board members questioned CalPERS’ ongoing policy to focus on fewer managers in recent years to reduce fees, arguing that it may have also reduced the number of investment opportunities.

“By having a concentrated set of managers, there’s a risk you’re beholden to their fundraising schedule,” Hartt said. “If they’re not in the market, then it’s difficult to deploy capital.”

He noted the investment staff is being selective with commitments, but also pointed to high distributions in the asset class and the difficulties of reinvesting cash quickly enough. He added that CalPERS may not always be able to get its full desired commitment to highly sought-after funds.

“There are challenges to being just a fund investor and deploying much more than $4 or $5 billion a year,” he said. “It’s hard to do. That being said, there can be other things in terms of separate accounts and things of that nature that can be done.”

The staff is currently studying and considering alternative investment options.

Hartt noted the private equity portfolio has shown some improvement in terms of performance in the past year, but not to the extent that public equities have performed.

CalPERS credit portfolio totaled $3.03 billion, or 11.7 percent of its $25.89 billion private equity commitments, as of the end of second quarter, according to the latest chief investment officer performance report.

The pension plan's credit-related portfolio showed a net return of 1.7 percent last quarter, compared to 10.53 percent over the last year, 1.15 percent over three years, 8.12 percent over five years, and 10.2 percent over 10 years ending 30 June.

By comparison, the overall private equity portfolio returned 13.9 percent for the year, below its benchmark’s return of 20.3 percent. Private equity also missed its three-, five- and 10-year benchmarks.