CalPERS Approves New Private Assets Allocation in Private Equity Push

The California Public Employees’ Retirement System board on Monday approved a plan to increase the fund’s target allocation to private assets to 40% from 33%, in a bid to maximize returns from the portfolio’s highest-performing asset classes.

The plan, which continues a private-asset strategy implemented under former CIO Nicole Musicco, raises the fund’s target for private equity to 17% from 13% and the target for private debt to 8% from 5%. Both PE and private debt allocations will have a policy range of +/- 5%. Additionally, CalPERS will decrease the policy target for public equities to 37% from 42% and for fixed income to 28% from 30%.

The new private debt policy will have a range of 20% to 100% for direct lending and a 0% to 40% policy range for specialty lending, real estate financing and mortgages. The new policy will remove liquidity financing and private structured products from the fund’s investment strategy

As of January 31, CalPERS had $68.7 billion in private equity assets and $12.3 billion in private debt, representing 14.2% and 2.5%, respectively, of the fund’s $482.9 billion total assets.

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Why Now?

CalPERS found in a mid-cycle asset allocation review completed this month that the private equity asset class provided the highest expected long-term return for the fund.

Private equity in the CalPERS portfolio had a 10-year annualized return of 11.8%, as of June 30, 2023. Public equities had an annualized return of 8.9% for the same period. Fixed income and real assets returned 2.4% and 7.7% annualized, respectively.

The last time CalPERS approved a new asset allocation was in late 2021. Effective July 2022, that plan increased the fund’s allocation to private equity to 13% from 8% and added a private debt strategy that made up 5% of the portfolio.

CalPERS re-evaluates its asset allocation every four years during its asset-liability management review, with a mid-cycle asset allocation review occurring during each period. The next asset-liability management review is scheduled for 2025.

Too Little, Too Late?

CalPERS’ previous CIO, Musicco, who left the fund in September 2023, had a strong background in private assets, having been head of private equity funds and co-investments at the Ontario Teachers’ Pension Plan and head of private markets at the Investment Management Corp. of Ontario.

Musicco criticized CalPERS’ slow pacing into private equity in a September 2022 board meeting: “If we take a sharper look at our private equity program, really this era between 2009 and 2018 was a period of time when we really stopped committing our pacing, our commitment to the program overall. It was really put on hold.”

Musicco noted in the same meeting that the fund lost out on a private equity boom during that period because of its private equity pacing. “It’s estimated anywhere from $11 to $18 billion, and that’s just because of inconsistent capital deployment.”

CalPERS scaled back its private equity allocation in the 2021 asset-liability management review “due to limited implementation capacity,” according to the mid-cycle asset-liability management review, published Monday.

According to PitchBook, CalPERS’ returns between 2008 and 2018 lagged those of its peers in almost every asset class, with private equity lagging the most.

The years of 2022 and 2023 were difficult for private equity returns across the board, as many general partners are holding onto portfolio companies for longer, a result of sky-high valuations in 2021. Since 2021, private equity deal value has declined 60%, deal count has declined 35% and exit value has declined 66%, according to Bain & Co.

According to the CalPERS board, it expects to name finalist candidates for the CIO position by the end of March.

CalPERS’ Private Equity Allocation Remains Nearly $7B Under Target in Q3

CalPERS CIO Nicole Musicco Will Step Down

Tags: California Public Employees’ Retirement System, CalPERS, Nicole Musicco, private assets, Private Credit, Private Equity

Private capital distributions to investors these days are below what they should be, according to Hamilton Lane, the private investment manager and consultant.

In a report, the firm addressed general partners of private asset funds, charging that they are being stingy with distributions: “We hear you tell limited partners that you are returning lots of capital. You are … kind of. Stop living in a bubble. You are returning lots of capital, but you have a boatload of capital still locked away.”

In 2023, the GPs of private asset l funds—meaning private equity, private credit and venture capital—cumulatively returned almost 30% of their net asset values to the limited partners, aka investors, Hamilton Lane stats showed. That was down from around 35% in 2022 and almost 60% in 2021. Among private asset types, private credit has the best distributions and VC the worst, at about one quarter of credit’s payout.

Hamilton Lane does not address how much capital these alternative funds have in reserve, but the industry has long insisted that it needs to be ready for any shocks, as it discovered painfully in the 2008 global financial crisis. Higher interest rates and fears of an economic downturn are among the oft-cited factors for a cooling of private asset funds nowadays, with lower fundraising and exits.

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Private assets have expanded enormously in recent years, now totaling $9 trillion. But the recent pullback in distributions stems from the decline of both merger and acquisitions activity and initial public offerings, which produce cash to pay out to the limited partners, GPs say. “The general partners need to generate liquidity for their investors, but they can’t get exits,” says Jerald Khoo, a senior vice president in Aon PLC’s M&A transactions solutions division, which advises private asset funds.

Fresh investments for private capital are down, and the Hamilton Lane report pointed to the falloff in distributions as a prime reason, particularly for institutional investors. “One of the oft-cited reasons for the lack of institutional capital available for fundraising is the lack of money being returned to limited partners to reinvest,” the study declared.

As a result, the time it takes to liquidate funds has gotten longer lately. Private equity used to take an average of four years, back in 2000, but by 2023, that had increased to eight years. The one saving grace for these funds is that, when liquidating assets takes longer, purchasing demand for assets slackens, so acquisition bargains become available, the report added.

The funds’ sales of portfolio holdings in 2023 were a lot lower than in previous years. Although Hamilton Lane had no averages, the report’s scatter plot graphics demonstrated many 2023 sales were in negative territory, as opposed to far fewer in 2021.

Is there any hope that payouts will increase? The report contended that GPs now are detecting an imminent rise in “exit activity,” meaning a turnaround in deals: “While [GPs are] an optimistic group, we note that they were correct last year that we would see a decline in exit activity so, for those investors hoping for more money back from their private portfolio, this is a good sign.”

One new source of liquidity for investors, Hamilton Lane pointed out, may be from a boost in a special kind of GP borrowing, called NAV loans (NAV for net asset value), presumably because they are backed by portfolio assets. Addressing GPs, the report advised: “You can do whatever you want with that money. You can use it to lend to a company in your portfolio or you can send it back to your limited partners.” Some 15% of private asset funds have such loans, the firm stated.

Hamilton Lane criticized NAV borrowing because the loans often happen without LP approval. Interest rates can be high, as much as 11% annually, which means that if a borrowing fund does not perform well, its return is diminished and LPs suffer. “Most LPs have a lower cost of capital than that and don’t need GPs to borrow for them. It’s a terrible capital allocation decision,” the report commented.

The Hamilton Lane write-up, laden with Baby Boomer pop cultural references (Janis Joplin, Spinal Tap), also featured recurrent references to Shakespeare, in particular “Hamlet.” It parodied the Prince of Denmark’s famous soliloquy: “To invest, or not to invest: that is the question/Whether ’tis better to hoard my cash and suffer/The slings and arrows of those who want their money back/Or to invest—invest in what? Credit, infra, real estate, buyout, VC?”