New Private Equity Model Could Push CalPERS Up in Global Ranks

The California Public Employees’ Retirement System (CalPERS), the largest private investor in the US, would likely move up in the global ranks under its plan to start a private equity direct investment organization, statistics and interviews show.

CalPERS’s $27.1 billion private equity program tops the US numbers currently among institutional investors and is seventh globally as of this month, show statistics from alternative investment data provider Preqin.

CalPERS plans to invest up to $6.5 billion annually, starting as soon as late 2018 or early 2019, if its board gives final approval to the direct investment program as expected. Another up to $6.5 billion would be allocated to its traditional private equity program, to grow or at least maintain the $27 billion allocated to its traditional private equity investments, CalPERS officials tell CIO. The combination would raise CalPERS’s profile in the global rankings.

The data shows that if other plans remain relatively stagnant in their private equity allocations as they have in the past few years, CalPERS could rise to fourth globally within a year’s time, just below the third-place sovereign wealth fund in the United Arab Emirates, which has $41.2 billion invested in private equity investments.

The two largest global private equity investors are the Canadian Pension Board with $61.4 billion, followed by the sovereign wealth fund in Kuwait with $52.4 billion, the Preqin data shows.

CalPERS could surpass the now fourth-ranked Central Provident Fund in Singapore with $39.4 billion and would very likely pass the fifth-ranked Ontario Teachers’ Pension Plan with $28.5 billion, and the sixth-ranked APB, the Dutch pension plan, with $27.8 billion.

CalPERS would also jump way ahead of the California State Teachers’ Retirement System (CalSTRS), which has the second-largest private equity portfolio in the US, with $20.8 billion in holdings, Preqin numbers show.

However, it’s difficult to make an exact estimate of how big the CalPERS program will get, because distributions also must be figured in. Even if its private equity allocations stay the same, each year at CalPERS and other pension funds, some of their traditional limited partner/general partner relationships wrap up after distributing profits.

But what is clear is that CalPERS, which is largest US institutional investor with around $360 billion in assets under management, will be building a much larger private equity program if its direct investment program becomes a reality.

It would also be able to use its well-known name in institutional investment circles to aim for success for its direct investment organization, said David Wessel, adjunct professor of finance and a director of executive education at the University of Pennsylvania’s Wharton School.

“CalPERS has a strong reputation that could help it attract investments,” said Wessel. The professor says that the key question is whether CalPERS will be able to get the right investment talent who can find the top deals necessary.

One part of CalPERS’s direct investment organization—called Innovation—plans to focus on late-stage venture capital details in technology, life science, and healthcare companies.

The second program—called Horizon—aims to make buy-and-hold investments in more traditional companies, eschewing the normal seven- to 10-year private equity cycle in the traditional funds CalPERS invests in as a limited partner.

CalPERS officials say they envision both Innovation and Horizon would grow to investment funds of $10 billion each over the next decade.

CalPERS’s traditional private equity program wouldn’t be neglected, even with the new direct investment organizations.

John Cole, a CalPERS investment director, told CIO that CalPERS needs to retain and grow its $27 billion traditional private equity portfolio, which is largely in co-mingled funds with general partners, in order for the pension plan to meet its desired goal, a 10% weighting of the total portfolio towards private equity.

Private equity currently makes up around 8% of CalPERS’s approximate $360 billion portfolio.

Private equity has also been its best-producing asset class over the last two decades.

Building the traditional CalPERS private equity program to a larger size will also mean that CalPERS will have to be able to make additional commitments in a competitive marketplace.

CalPERS statistics show that the pension plan only committed slightly over $3 billion in new private equity commitments in its traditional program in the fiscal year ending June 30, 2017, a number that has stayed relatively stagnant since the financial crisis.

However, that number is going up. Megan White, a CalPERS spokeswoman, said in an email that the commitment number increased to $5 billion in the fiscal year ending June 30, 2018. She said CalPERS expects it can commit $6 billion in the current fiscal year.

Commitments, however, don’t mean investments. CalPERS statistics show that the traditional private equity program still has more than $14 billion in dry powder, money committed by the pension plan but not invested by its general partners.

CalPERS is still conducting a review of its traditional private program. Six firms—BlackRock, Goldman Sachs Asset Management, Hamilton Lane, Neuberger Berman, AlpInvest Partners, and HarbourVest Partners—have submitted proposals to run all or part of CalPERS’s traditional private equity program.

Cole said CalPERS is still reviewing whether to outsource all or part of the traditional private equity program. A final decision is expected by the end of the year.

Sources familiar with all CalPERS operations say while part of the program could be farmed out, CalPERS officials are leaning towards retaining control over much of its traditional private equity program.

On the direct investment front, the CalPERS full board is also expected to see the final proposal for the direct investment program by the end of this year or early next year and then vote on whether to approve the program or not. A majority of board members have expressed support for the direct investment program and have already given a preliminary go-ahead for CalPERS to plan the two direct investment organizations.

While CalPERS would fund the two organizations, they would be run independently and would not be under direct control of the pension plan.

By Randy Diamond