Private equity fund managers should take heed of the California Public Employees’ Retirement System’s (CalPERS) overhaul of its allocation to the asset class and focus on justifying the terms they present to clients, according to Preqin.
“CalPERS’ decision serves as an effective statement to fund managers on the importance of justifying fund terms.” —PreqinThe research firm was responding to last week’s announcement by CalPERS that it wanted to drastically reduce the number of private equity managers it uses in order to cut costs.
“The decision by CalPERS may not immediately result in a drop in overall commitments to private equity funds,” Preqin said in a research note, “but serves as an effective statement to fund managers on the importance of justifying fund terms, as well as the power of the limited partner.”
The research firm said CalPERS’ decision reflected a wider concern among investors that fees were the biggest challenge to their investment in private equity. Roughly 58% of respondents to Preqin’s survey of US public pensions said fees were their chief concern.
However, appetite for private equity has not waned: the research showed that the number of US public pensions active in the sector rose in each of the past four years. Pensions’ average target allocation also rose in each of the past four years.
CalPERS has roughly 10% of its $296 billion portfolio invested in private equity. Preqin reported that this allocation included 444 funds and 298 active partnerships.
The $187.1 billion California State Teachers’ Retirement System (CalSTRS) is the second biggest public pension allocator to private equity in dollar terms, having invested $21.1 billion (11.3% of its portfolio) in the asset class. Texas, Oregon, Michigan, Washington, and Pennsylvania pensions have all allocated more than 10% of their portfolios, with the latter two investing more than 20%.
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