CalSTRS board wants to see more co-invest data prior to PE-staff increase

California State Teachers Retirement System is considering a staff recommendation to increase its private equity staff by 60 percent, but board members say they want more data on performance and savings before going forward.

CalSTRS PE head Margot Wirth wants to increase the PE staff to 40 from about 25 to help the pension pursue co-investment opportunities that are a key to its “collaborative model” in private assets-investing.

In recent years CalSTRS has boosted its co-investment activity, but it’s reaching the limits of its current staffing model.

“The upshot is in recent years we’ve been putting out about 10 percent of our commitments in private equity to co-investments, and over the next two to five years, we’d like to at least double it,” Wirth said at the Jan. 30 board meeting.

Investment committee Chair Harry Keiley said he wanted more data about co-investment performance to get to “a level of conviction that the cost of doing this is worth it.” Wirth said she would be bringing more cost and performance data at the pension system’s May meeting.

CalSTRS’s PE consultant, Meketa, said the plan entailed some operational risks and hte increased co-investment program was not something that CalSTRS could simply “turn on and turn off” again.

Meketa Principal Steve Hartt said fee savings alone would not be enough to justify a co-investment program of the scale CalSTRS envisions.

“Co-investment makes a lot of sense for CalSTRS — they’re doing it now, others are doing it now — but the issues around execution are important,” Hartt said at the meeting. “The portfolio of co-investments has to perform at least as well on a gross basis as the regular fund investments.”

Wirth said the co-investment program would help CalSTRS stay ahead of peers, which are catching up to the kind of co-investments CalSTRS has been pursuing for years.

“The issue is not that there’s a shortage of GPs willing to do co-investing. The issue is that there are a lot of LPs [who all have the same idea], and that is making the competition harder,” Wirth said. “What you did five years ago would not put you competitively on a sound footing.”

CalSTRS plans to build on its current co-investing experience, hiring more staff that can handle co-investment responsibilities and providing more training to existing staff.

CalSTRS has eight senior staffers for PE, and four of them are currently trained in co-investing, Wirth said.

“We are not novices at co-investing and we are not new to the game by any means, but relative to our size we are leaving a lot on the table,” Wirth said.

“If we want to go from 10 percent to 20 percent co-invest, we would need to cross-train our team. … It’s basically extending what we already have, scaling up.”

Action Item: See the slides from the CIO report at CalSTRS January meeting here: https://bit.ly/2MFKuHs