The private equity program at the California Public Employees’ Retirement System (CalPERS) is continuing to shrink, shows a new report by Meketa Investment Group, the system’s PE consultant.
Meketa says the largest US pension plan needs to be able to increase PE commitments on a steady basis to meet its 8% target allocation to the asset class. CalPERS staff and Meketa agree that the pension will need to invest at least $10 billion per year into private equity opportunities—a substantial increase over the $6.7 billion (2018-2019), $5.3 billion (2017-2018), and $3.3 billion (2016-2017) in fiscal years prior.
Meketa, in a report to be presented to CalPERS investment committee Monday, notes the reverse is occurring: the private equity allocation at the approximate $380 billion fund is shrinking.
Meketa said at the end of the June 30, 2019, fiscal year, the CalPERS private equity portfolio was $26.5 billion, an approximate 3% decrease over the prior fiscal year’s $27.2 billion.
“One of the key challenges faced by CalPERS is to deploy capital on a steady basis in order to maintain the desired allocation to the private equity asset class,” said the Meketa report.
CalPERS investment officials have said they can’t find enough suitable private equity investments to build the asset class to the scale they would like. They have acknowledged intense competition among institutional investors to become limited partners in funds run by the most successful private equity general partners.
Meketa said the current private equity exposure is 7.1%, compared to the desired 8%. Just several years ago the program’s size had exceeded 10% of CalPERS’s total portfolio.
Part of the problem, the report notes, is that not all the money being committed is being called by private equity general partners. The pension plan is also seeing new commitments negated by fund redemptions.
“While the program had an overall value increase of over $2 billion, the underlying managers returned substantially more cash (largely from exited investments) than they called for new investments, leading to a net decline in the Program’s NAV,” Meketa said.
Distributions from general partners in the private equity program in the latest fiscal year totaled $7.4 billion outpacing contributions of $4.6 billion, the report said.
The contributions are made up of money called by general partners from commitments made over a period of years, not in one single year.
The private equity consultant said unfunded commitments from CalPERS’s general partners was $18.5 billion at the end of the June 30 fiscal year.
Private equity is CalPERS best-producing asset class, both short-term and long-term.
In the latest June 30 fiscal year, the asset class produced returns of 7.7%. Over the three-, five-, and 0-year periods ending June 30, it produced returns of 12.5%, 9.6%, and 14%, respectively
The asset class’ performance can be seen here:
NAV ($ mm)
1 Year (%)
3 Year (%)
5 Year (%)
10 Year (%)
CalPERS PE Program
Excess vs. Policy Benchmark (%)
FTSE All World + 150 bp (%)
Excess vs FTSE All World + 150 bp (%)
Source: Meketa Investment Group
CalPERS investment staff has been working on its own direct-style private equity program, which would increase the allocation to PE, but the program is still a work in progress. The pension’s investment committee approved a plan to create two new private equity organizations in March 2019 that would see up to $20 billion in direct investments.
CalPERS Board President Henry Jones said in a separate interview that CalPERS investment staff continues to look for investment partners to run the program but offered no specifics as to whether CalPERS was close to signing a deal.
The pension fund’s investment staff had originally hoped to have the program running by the end of this year.
Meketa did not offer a timetable in its report, only acknowledging the importance of the program to increasing the size of the CalPERS private equity program.
The consultant said investment staff is also continuing to develop a comprehensive plan for sourcing, analyzing, executing, and managing private equity co-investments, with a focus on opportunities sourced from CalPERS’s core managers.
CalPERS private equity co-investment program is around $2 billion. The pension plan stopped making co-investments in 2016, a decision made by its former Chief Investment Officer Ted Eliopoulos. It has never been publicly disclosed why Eliopoulos stopped the investments.
Meketa said CalPERS investment staff also is looking to expand the private equity program beyond its core 30 general partners. “The expansion of the manager set provides opportunity, not only to increase scale, but also pursue strategies beyond the mega and large buyouts in order to add portfolio diversification,” Meketa said.
In May, CalPERS appointed a new chief for its private equity operations. Greg Ruiz was selected after a two-year search, replacing Real Desrochers, who left the fund in 2017 to join Chinese bank CITIC.