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CalSTRS to target small, mid-market firms

  • $184.8 bln pension to focus on “breakout groups”
  • To fold emerging managers program into rest of PE portfolio
  • PE portfolio 65 percent exposed to 2005-2008 vintages

Room for the pivot will be made by reducing the size of commitments to large buyout funds, Director of Private Equity Margot Wirth told Buyouts.

The shift in emphasis stems in part from CalSTRS’s exposure to pre-financial crisis vintage mega-buyout funds, Wirth said. Vintage funds from 2005 to 2008 account for 65 percent of the portfolio’s estimated $21 billion private-equity exposure, according to the investment plan, and many of those funds have performed poorly relative to benchmarks.

“Those vintages are not going to end up terrible,” Wirth said. ”We just had a very high exposure to those types of funds.”

The $184.8 billion retirement system, which has some 125 private equity fund managers, is particularly interested in backing “breakout groups,” Wirth said, referring to fund managers with strong track records at the lower end of the buyout market. She cited Palladium Equity Partners and ICV Partners as two such firms that CalSTRS has recently backed.

The retirement system already has exposure to emerging managers and niche strategies through its $818 million Private Equity Proactive Portfolio. That program had been managed by a dedicated staff operating independently of the rest of the private equity team for most of the last decade, Wirth said. CalSTRS has spent the last year integrating that staff into its main private equity team, moving Proactive opportunities through the same due diligence process used for larger, more established managers.

The Proactive portfolio consists of 123 active vehicles backed through funds-of-funds managed by Invesco, Muller & Monroe Asset Management and BAML Capital Access Funds Management, a Bank of America Corporation subsidiary. In April, CalSTRS boosted its allocation to the program by increasing BAML’s mandate by $100 million and by committing $100 million to Muller & Monroe’s latest $400 million fund of funds.

The CalSTRS 2015 fiscal-year plan also calls for improvements to the $1.4 billion co-investment program. Wirth said the “ongoing process” could include additional improvements to its portfolio analytics, risk control and due diligence capabilities.

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