CalPERS, the largest public pension fund in the United States, is undergoing significant changes as it closely examines its private equity investments including the fees that it is paying to managers.
Private equity allocation
CalPERS’ private equity assets represent approximately 8% of its overall portfolio and are valued at close to $26 billion. The pension fund’s staff wants to eliminate the requirement that 8% of its portfolio be allocated to private equity, and it is considering whether it will combine its private and public equity investments.
CalPERs may decide to use a common benchmark for its private equity and global equity programs to avoid silos and promote the exchanging of information between the staff managers running each asset class.
Focus on reduced costs and external managers
The internal review is part of the pension fund’s desire to cut costs. CalPERS spent $1.473 billion on investment expenses for the year ended June 30, 2016. While CalPERS’ private equity assets produced an annual return of 12.3% over the prior 20 years, the returns would have been an additional 7% without the fees.
To lower fees, the pension fund plans to significantly reduce its number of external managers. There have been reports that the pension fund’s goal is to reduce the number of fund managers to 30 total (down from 99 as of June 30). In connection with the focus on streamlining the number of managers, CalPERs has sold interests in 26 private equity funds for $426 million in the last six months. CalPERS is also considering other options including making private equity investments directly.
Private equity chief resigns
All of this comes on the heels of CalPERS’ private equity chief, Réal Desrochers, stepping down to join the private sector. Chief Investment Officer Ted Eliopoulos and investment director John Cole are overseeing the current internal review of private equity at the pension fund.