CalPERS may channel more dollars to buyouts, give staff added flexibility

Investment staff at California Public Employees’ Retirement System have proposed to notch up their target suballocation to buyouts, and to ease limitations on choosing buyout and other kinds of private equity funds.

The proposal has been overshadowed by a recent flurry of news at the $356 billion pension fund, the country’s largest. This includes the looming departure of CIO Ted Eliopoulos at year’s end and the proposed launch of CalPERS Direct, a program that would include two new direct PE platforms.

Under the proposed changes to the Private Equity Program Policy, which could the CalPERS investment committee could approve at its Aug. 13 meeting, staff would bump up the allocation target to buyouts to 65 percent of its PE portfolio from 60 percent.

The change, which would accompany a reduced allocation to credit-related strategies, would free up an estimated additional $1.25 billion for investments in buyouts.

In addition, staff would no longer face predetermined limits on commitment amount when it comes to backing fund managers deemed first-quartile or second-quartile (which has a lower limit).

“By eliminating the sublimits, staff can consider a wider range of variables such as portfolio fit, investment pacing, strategic relationship, and fees in sizing the fund commitment,” wrote executives at Meketa Investment Group in a July 23 letter to Henry Jones, chair of the investment committee. Meketa was asked to assess the proposal.

“While important,” the executives wrote, “quartile ranking of past performance is not fully indicative of the potential future performance of a private equity manager, particularly early in a fund’s life.”

At the same time, the proposal also eliminates a separate limit for funds managed by emerging managers, enabling staff to treat their funds “on an equal basis with all fund opportunities,” the letter says.

Neither executives at CalPERS nor Meketa were available for comment, so it is unclear what exactly the sub-limits were for first-quartile, second-quartile and emerging-manager funds.

Staff has also proposed moving to a new model to determine how much staff may commit to PE each year.

Whereas previously the scale of commitments was determined by annual targets tied to the pension fund’s size, they will now be set at annual fixed dollar ceilings — $10 billion to funds, $3 billion to co-investments, $5 billion to customized investment accounts and $3 billion to secondaries.

“A benefit of dollar limits is that they are clear and do not fluctuate based on changes to the size of the” pension fund, wrote the Meketa executives.

The proposed limits are based on a pension fund of $356 billion and “may change should the size of the [pension fund] change dramatically.”

Among other proposed changes to the PE policy, according to the Meketa letter:

• The senior investment officer in charge of private equity would have authority to approve co-investments of up to $300 million, while the CIO would have authority to approve co-investments up to $600 million. These “generally correspond with the limits under the existing policy,” the letter said.
• Staff may consider co-investments outside funds to which CalPERS has committed, provided the pension fund has at least one active commitment with the fund manager. This would let CalPERS consider a broader range of opportunities.
• The investment committee will have to approve proposals by the chief investment officer to increase the commitment to a customized investment account by up to 20 percent, provided performance is top quartile. Today the CIO does not need committee approval.

Action Item: Reach the CalPERS Investment Office: +1 916-795-3400