CalPERS Pressured into Rethinking Private Equity Strategy

Pension fund defends use of “essential” asset class, despite high fees.

The $324 billion California Public Employees’ Retirement System (CalPERS) may reduce its private equity exposure after receiving public criticism for investing in the high-fee asset class.

At the CalPERS investment board meeting earlier this week, CalPERS CIO Ted Eliopoulos said that beginning in July, the pension fund will review the private equity business models available to it. He said this was necessary so that the fund can find an “effective governance system to oversee private equity investing,” or else it would have to reduce its allocation to private equity investments. Private equity assets represent a little more than 8% of the fund, or almost $26 billion, which was cut just last year from 10%. 

CalPERS, the largest public pension fund in the US, has been the target of public pressure to disclose and account for the fees it pays for its private equity investments. According to an April report in Barron’s, nearly 85% of CalPERS’ private-equity portfolio is invested in holdings that have a so-called two and 20 fee structure, where the fund has to pay a fee of 2% of assets under management and 20% of the profits.  And late last year, CalPERS revealed that approximately 14% of its profits from private equity investments were paid out in fees to managers.

The “fish bowl of CalPERS may have reached a tipping point for us in private equity,” Eliopoulos told the investment committee, according to Reuters. “Over the course of the past two years and frequently in these monthly investment committee meetings, CalPERS staff is attacked and denigrated for our decision to invest in these funds.”

Although the fund’s private equity fees have been high, the returns have been high as well.  Despite its relatively small portion of the fund, private equity investments are CalPERS’ highest-returning asset class. Since its private equity program was launched in 1990, it has contributed more than $25 billion in profits, according to CalPERS.

“Few investments are as essential to CalPERS’ success as private equity,” said Henry Jones, chairman of the CalPERS Investment Committee and vice president of the board, in a statement released June 21.  Jones said critics of the fund’s private equity practices are doing more harm than good, and were often launching personal attacks on CalPERS investment professionals. He defended the fund’s transparency, saying that it was a leader in private equity fee disclosure.

“CalPERS has invested in private equity for over 25 years,” said Jones.  “Without question, a large, strong private equity program will be a significant part of our portfolio for years to come.”



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