The sale by California Public Employees’ Retirement System of $3 billion-worth of private equity real estate fund stakes last year was the largest of its kind and marked a high point in the alternatives secondaries market.
Since then, the largest public pension plan in the US has tapped the market again, testing the waters with a large private equity stake sale, as reported in May by Secondaries Investor. Sources familiar with the deal say this sale could be as large as $2.7 billion.
Last week, a report by Pension Consulting Alliance on CalPERS’ first half private equity programme performance showed the pension disposed of 46 fund positions representing more than $2 billion during the fiscal year. The sale generated around $450 million in proceeds and resulted in a reduction of ties with 24 managers.
A big reason why CalPERS has been using the secondaries market – and delighting secondaries buyers in the process – is that it wants to reduce the number of external managers with which it has relationships.
In 2011, CalPERS began a five-year strategic plan to reduce risk, cost and complexity in its portfolio of external managers and aims to cut the number of direct relationships it has with general partners from 93, as of 31 December 2015, to 30.
So far, the pension has been able to slash the annual costs of its investment operations by $134 million over the last five fiscal years by reducing the number of relationships, moving assets from external managers to internal teams and negotiating lower external management fees.
All of CalPERS’ sales have been driven by the same rationale of getting rid of non-core relationships in order to reduce management fees, a source familiar with the pension fund’s sales told Secondaries Investor. This pressure to scrutinise the amount of fees it pays to managers came to the fore when it emerged last year that the $295 billion pension was unable to track how much it had paid private equity managers in carried interest.
CalPERS has hired different advisors, including UBS and Cogent Partners, to advise on these large portfolio disposals, with Greenhill Cogent working on the most recent sale, according to sources.
Buyers of portions of CalPERS’ portfolios have included the usual suspects, such as secondaries firms Ardian, Coller Capital and Strategic Partners, and the almost $10 billion-worth of private equity fund stakes CalPERS has brought to market in the last decade have included mainly buyout, venture capital and growth equity.
Large sales from public pensions have been providing ample dealflow for secondaries buyers, many of them raising ever-larger funds to absorb big portfolio disposal. In April, Ardian held a final close on $10.8 billion for its latest secondaries vehicle and has said it will focus on complex transactions of more than $1 billion where there is less competition.
CalPERS is not reducing its commitment to private equity; in June, the pension fund said it would reaffirm its 10 percent target allocation to the asset class. Still, there may be more pickings for buyers to come.
“I am optimistic we will continue to make meaningful reductions in the future,” the pension fund’s chief investment officer Ted Eliopoulos said in May, a sign CalPERS may tap the secondaries market yet again.
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