NEW YORK (Reuters) – The California Public Employees’ Retirement System (Calpers), which manages $169 billion in public pension funds, may boost its private-equity investments by about 40 percent as slumping markets create some acquisition bargains.
Calpers’ staff and its consultants, meanwhile, recently discussed creating an “opportunistic strategy” fund to take advantage of loans and bonds knocked down to distressed prices during the credit crisis. This proposal is not on the agenda next week and is at the earliest stages.
The board of the country’s largest public pension fund is next week scheduled to vote on a plan that would increase the fund’s target for corporate buyout and venture-capital investments to 14 percent from 10 percent.
Spokesman Clark McKinley said the fund’s $22.8 billion of such “alternative” investments currently represents 13 percent of total assets — at the upper end of the fund’s range. That figure has jumped as the sinking value of stocks and other assets reduced the size of the overall fund.
“This is a great time to make some good deals,” the Calpers spokesman said. “When markets are down, it’s a good time to buy.”
When Calpers talks, people listen. The massive fund is one of the most influential U.S. money managers, and its views on allocations, corporate governance and other matters often are copied by other states and heeded by corporations.
Even a one-point move in Calpers’ allocation targets can make a big difference. At the high end of the proposed range, Calpers could at current fund levels invest more than $27 billion in buyout and venture funds, a $5 billion boost.
A memo to Calpers investment committee notes that pension consultants Wilshire Associates had recommended a 15 percent allocation to private equity, but the fund’s investment officers ultimately trimmed that target.
There are other changes under the proposed plan. Calpers would invest 49 percent of its money in stocks, including hedge funds, 19 percent in bonds, 10 percent in real estate and 5 percent in inflation-protected Treasuries.
These changes mean stock and hedge fund investments would slip 7 percentage points from 56 percent, and fixed-income would creep up one point to 20 percent. All equities, public and private, would shrink 3 percentage points to 63 percent under the new plan.
Calpers for the first time also plans to keep 2 percent of its money in cash, up from its traditional zero cash policy.
Calpers declined further comment on the new targets.
Actual investments can fall within a certain range around these targets, McKinley said, but the new ranges have been narrowed as market volatility subsides. Private equity and VC investments could range from 9 percent to 19 percent of the total fund under the new plan, for example.
Calpers sets its investment targets for stocks, debt and other assets every three years, and the current allocation plan expires in December 2010, the spokesman said. Calpers said it will do “a more thorough” asset allocation assessment next fall before setting targets for the next three years.
One proposal that may be considered by Calpers down the road is setting aside as much as 3 percent of funds for a portfolio of distressed debt — “toxic” securities and loans held by banks, mortgage-backed securities, preferred stock, and asset-backed bonds issued under the Fed’s Term Asset-backed Securities Lending Facility.
The distressed asset portfolio was discussed during a Calpers investment committee workshop last month, according to a June 15 letter from Pension Consulting Alliance Inc to the Calpers board.
Funding for this initiative might come out of Calpers’ stocks, fixed income or inflation-linked bond portfolios, according to a presentation to Calpers.
Calpers’ McKinley cautioned that the distressed asset proposal is “not ready for prime time.” To advance the proposal, he said, investment staff would introduce a policy item to a board subcommittee.
“That may happen, but it’s too early to say more about it,” he said.
(Reporting by Joseph A. Giannone; Editing by Richard Chang, Gary Hill)