CalPERS to keep reducing relationships, ramp up directs

The $231bn pension also plans to boost its exposure to private debt as well as specialty financing in emerging markets like China and Brazil.

The California Public Employees’ Retirement System will continue to reduce the number of managers it has in its private equity portfolio this year, as well as examine opportunities with managers of spinouts from larger institutions.

The $231 billion pension, the largest in the US, published its alternative investment management programme review recently. The review included a “2011 roadmap” with such recommendations as “focusing on improved terms, alignment of interest and transparency”, and “continued refinements to manager selection and monitoring process”.

It's not clear which managers the pension has cut out of its portfolio, but CalPERS is selling about $800 million-worth of private equity stakes on the secondaries market.

The pension also plans to “bolster” its direct investment capabilities. It’s unclear if the pension has made any private equity direct investments over the past year, but the pension last year said it was looking for more “unique” fund structures with general partners that charge lower fees and offer more customised portfolios.

Several traditional private equity LPs have been moving further into direct and co-investments as they look for ways to take more control over investment decisions and pay lower fees. This is a trend that has been going on for many years in Canada, but has only recently arisen among US LPs like CalPERS that have the resources to operate sophisticated investment teams.

Other goals for 2011 laid out in the programme review included getting exposure to mid-market restructuring, private debt and specialty financing opportunities and focusing on “growth markets”, including China and Brazil.

In the case of China and Brazil, CalPERS may be behind the times as both countries have become increasingly crowded with managers and capital chasing deals. China is widely considered an “emerged” market at this point because of the sheer number of managers and the amount of capital in the country. Brazil is the hot market right now and is where China was a few years ago, but the country has become competitive enough to experience ever-increasing deal values.

Other economies in Latin American, including Colombia and Peru, will be better areas for growth in the next few years, though Brazil will continue to provide good opportunities for investors, at least as they relate to the developed markets in the US and Europe, sources have told PEI.

CalPERS is slightly over-weighted to alternatives with an actual allocation of 14.1 percent, or $31.7 billion. The pension’s total exposure, including its $31.7 billion market value and its $16 billion of unfunded commitments, is $47.7 billion.

The pension’s largest exposure by far is to large/mega buyouts, with 37 percent of the portfolio committed to those funds. The next largest exposure is to mid-market buyouts, at 20 percent, and then credit opportunities, with 15 percent.

CalPERS will also be going through some personnel changes, as recently the pension’s senior portfolio manager for alternatives Joncarlo Mark resigned. The pension’s head of private equity, Leon Shahinian, resigned from CalPERS last year.