The California Public Employees’ Retirement System, the US’s largest public pension, will expand its secondaries investment capabilities as a way of dealing with raging competition in the private equity market.
Speaking at its investment committee meeting on 19 February, Steve Hartt of Meketa Investment Group said that greater opportunistic direct investment, co-investment and secondaries investments could help CalPERS reach its target private equity exposure without having to rely on GPs and their fundraising cycle.
Intense competition among limited partners to get into the best funds, availability of dry powder and high valuations are leading to challenges in committing to private equity funds, even for large LPs such as CalPERS.
Last year CalPERS committed $6 billion across 18 private equity managers. According to Hartt, without secondaries, co-investments and direct investments, the pension giant would need to dramatically increase that number to fulfil its aim of reaching $10 billion.
“That would be a lot for this structure, to be able to find 30 attractive investments per year that they can invest at that scale,” he said.
CalPERS has to write large cheques for its $27.8 billion private equity portfolio, and that creates capacity constraints since many GPs are seeking a diversified LP base and come to market every three or four years for fundraising, said Andrew Junkin of Wilshire Associates, CalPERS’ investment advisor.
Private markets will remain inefficient and skillful managers will continue to exploit the market inefficiencies in private equity, chief investment officer Yu Ben Meng said during the meeting. With more companies staying private for longer, CalPERS will need more commitments to private equity just to stay on par with the market opportunity shift, he added.
“We need private equity, we need more of it, and we need it now,” Meng said. “But we will do [private equity] in the most risk prudent way and in the most risk intelligent way.”
CalPERS does not have plans to bring its private equity programme in-house yet; the challenges of developing a direct private equity programme are timing and sequencing, Meng said, adding that the pension does not have the expertise in house.
“Our current governance structure and also the fact that we’re not located in a global financial center seriously hinder our ability to attract the expertise in house,” Meng said.
“I think we should test out an idea and prove the concept for a while. And if it works, then we can explore bringing it in-house. We need to learn how to walk before we can run.”
– Preeti Singh contributed to this report.