California Public Employees’ Retirement System (CalPERS) slashed its private equity investment costs by nearly 40 percent between 2014 and 2015.
According to materials prepared by Cost Effectiveness Measurement for the pension fund’s 15 May board meeting, CalPERS’ private equity portfolio cost $331.4 million in management fees in the 2015 calendar year, down from $530.5 million in the previous year.
The portfolio was divided into diversified private equity, which cost $260.1 million in 2015; diversified private equity fund of funds, which cost $70.2 million; and diversified private equity co-investments, which cost $1.1 million.
In addition to cutting its year-on-year private equity costs, CalPERS also spent less on those expenses compared with its peers, CEM’s report showed.
This is in part due to the fact that CalPERS had 18.5 percent more exposures to private equity fund commitments than its peers during 2015. For this strategy, CalPERS’ cost was 84 basis points, about half of the peer median of 165 bps, according to CEM’s report.
On the other hand, CalPERS, which has $320 billion in assets under management, had a lower exposure to fund of funds, which CEM said is a more expensive strategy, at 7.2 percent below its peers, the report showed. This resulted in cost savings of $16.8 million for CalPERS and a 167 bps cost – significantly below the peer median of 231 bps.
As part of its efforts to reduce costs within the private equity portfolio, the pension has been cutting the number of its external manager relationships. CalPERS had relationships with 81 private equity managers on 31 December 2016, according to its latest CIO Performance Report, and has previously said it wants to reduce this number to 30.
Overall, CalPERS’ investment cost for its total portfolio was $951.2 million for the 2015 calendar year, down from $1.19 billion in the prior year.
CEM noted that, although the private asset management fees reported by CalPERS are far lower than those of its peers, the service provider collects gross fees based on limited partner contract terms due to inconsistent data availability. It pointed to the Institutional Limited Partners Association’s standardised private equity fee reporting template as a tool addressing that problem, but said it could be “several years” before investors report the data in a consistent, standardised manner.
For its benchmarking, CEM analyses data from 172 US pensions, 80 Canadian pensions, 57 European pensions and 10 Asia-Pacific funds.