The California State Teachers’ Retirement System made multiple changes to streamline its private equity investment practices at its September 25 investment committee meeting. The changes included amending its private equity policy, adding language on how it uses leverage and no longer requiring an independent fiduciary to verify transaction prices on co-investment deals worth less than $250 million.
In January, the CalSTRS board approved the use of leverage of up to 10% of the fund’s portfolio for portfolio and liquidity management at the total fund level. The policy changes added wording to address the use of leverage in the private equity portfolio, which was previously not included in the policy statement.
The fund’s investment consultant, Meketa, noted in its policy review that there would be no explicit leverage limit within the private equity portfolio, but that leverage would be determined by guidelines set in the investment policy statement.
The changes are designed to streamline CalSTRS’ collaborative model, overseen by CIO Scott Chan, who joined CalSTRS as deputy CIO in August 2018 and was promoted to CIO in July 2024. The model aims to reduce investment fees by internally managing assets and engaging in co-investments across private markets.
Since 2017, the model has saved the fund at least $1.6 billion, savings expected to compound over time and aid growth, according to the fund. In 2022, the fund’s co-investments across private markets saved the fund $245 million, according to CalSTRS.
In 2024, CalSTRS expects co-investments to make up 30% of its commitments to private equity.
Independent Fiduciary Requirement Review
CalSTRS also adjusted its independent fiduciary verification requirement, in which a third party verifies the entry valuation of every proposed co-investment opportunity.
The fund noted in a policy review that when the co-investment program was in its infancy, the use of an independent fiduciary was helpful when the program had fewer resources, experience and sophistication, but requiring it for all co-investment deals is now an impediment.
“This blanket requirement for all co-investments is now less necessary since the program is out of its infancy given the growth of the program,” stated CalSTRS board materials for its September 25 meeting. “Further it is likely one of the last holdbacks that prevents CalSTRS PE to be accepted into the ‘elite’ echelon of co-investors by GPs, which include the likes of” global institutional investors GIC Private Ltd., the Singaporean sovereign wealth fund; the Canada Pension Plan Investment Board; the Ontario Teachers’ Pension Plan; and the Abu Dhabi Investment Authority.
CalSTRS staff wrote that the requirement does not allow its decisionmakers to move quickly enough to keep up with other institutional investors.
“It is important for limited partners with co-invest programs to move quickly in a professional, efficient manner to continue to secure invitations to these processes among other world-class institutional investors,” the policy revision stated. “Within this peer group of leading national pension funds, sovereign wealth funds, and notable endowments, CalSTRS’ independent fiduciary requirement is unusual, if not unique, and has become a programmatic disadvantage to the Collaborative Model.”
Third-party verification now only applies to co-investment deals worth more than $250 million and deals on which the general partner of a co-investment has not been vetted by a PE program adviser.
When an independent fiduciary verification is necessary, the role of the verifier will now be to review a co-investing partner and how their co-investment fits within their investment strategy, as well as reviewing the entry valuation of the deal.
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Tags: Alternatives, California State Teachers’ Retirement System, CalSTRS, Leverage, Meketa, Private Equity, Scott Chan