Ben Meng, the chief investment officer of the California Public Employees’ Retirement System (CalPERS), told CIO that the retirement system continues to talk to investment teams to be part of a new direct-style private equity organization but said there is no timetable to implement the plan.
Meng made as his comments as the plan’s investment staff and board members held their semiannual retreat meeting in Santa Rose in California wine country.
Speaking to CalPERS board members later on Monday, Meng said CalPERS needed to leverage its strengths as an investment organization as it moves forward. While Meng did not mention the new private equity organization directly, in the past several months, he has mentioned that CalPERS can leverage its skills and size—which few other institutional investment organizations have—to build the new private equity program.
Meanwhile, CalPERS’s traditional private equity program, made up mostly of buyout funds, continues to shrink. CalPERS statistics show that the $26.6 billion private equity program is down to 7.5% of CalPERS’s total portfolio as of March 31, even below the pension plan’s own interim target of 8% of the total portfolio.
Just several years ago, the private equity portfolio exceeded 10% of the CalPERS portfolio.
Private equity is the $350 billion-plus plan’s best-producing asset class and Meng has said it is the only asset class for the next decade that is expected to produce a return above 7%. CalPERS’s expected annual return long-term is 7% but projections show returns will average 6.1% over the next decade.
If CalPERS falls below the 7% target regularly, it would reduce CalPERS 70% funded level even more.
Meng has said that CalPERS can’t get into the funds it wants as a limited partner, due to increased competition with other institutional investors, leaving a direct-style private equity program as the only way to expand the private equity asset class.
“We cannot access private equity, access private equity exposure, on the scale that we need, and then there are characteristics of the conventional private equity business model that are suboptimal in terms of our needs, namely the higher fees, lower transparency, and a relatively lower control,” Meng told the retirement system’s investment committee back in March.
After that statement, the investment committee gave Meng the go-ahead for the private equity plan, but final approval would still be needed, once investment teams were found.
CalPERS would create and fund two private equity investment vehicles under the new private equity plan: Innovation, which would invest in late-stage companies in the venture capital cycle in health care, life sciences, and technology, and Horizon, which would take buy-and-hold stakes in established companies.
The new private equity plan is also controversial. Several board members object to the plan laid out by Meng, who took over in January, and his predecessor, former CIO Ted Eliopoulos.
CalPERS would provide funds for Innovation and Horizon, but investments would be controlled by private equity general partners and not CalPERS. The pension would be the exclusive limited partner.
The CalPERS private equity plan differs from the Canadian model. Under that structure, Canadian pension plans often make direct investments themselves with general partners. Meng has said such a structure would be too complicated for CalPERS to adopt initially, though he said over the long term, the pension system could evolve its model.