CalPERS needs to upgrade its skills to succeed in private equity, CIO says

The $353bn California Public Employees Retirement System (CalPERS) needs to develop new expertise if it’s going to overhaul its private equity strategy, according to CIO Ted Eliopoulos.

CalPERS’ private equity portfolio is currently composed solely of traditional private equity funds run by general partners, and it has become quite good at vetting those partners and the opportunities they offer, Eliopoulos said at the mega fund’s June meeting. But that model won’t be enough to keep CalPERS near its preferred 10% allocation to private equity, which is why CalPERS is pursuing a new strategy that includes direct investments, a commitment to larger strategic partnerships and co-investments with private equity firms, and an increased focus on emerging managers.

The new strategy will require substantial additions to CalPERS’ internal skills and resources, so that it is less reliant on its private equity managers, Eliopoulos said.

“Our private equity program, our team, our systems, our methods are really geared all towards performing this function of selecting an external general partner,” Eliopoulos said. “The [new strategy] really seeks to add to this capacity the ability to select and invest in individual portfolio companies. This is a new domain.”

The board has not made a decision on the new strategy, but board members generally sounded positive when discussing the new model at the meeting. The plan also received an endorsement from University of California professor Ashby Monk, who said that more public pension plans could benefit from thinking outside the box on private equity.

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Published by Money Management Report/Pageant Media.

Institutional appetite drives a rise in PE ‘mega-funds’

As institutional investors try to ramp up or maintain their commitments to private equity without spreading themselves thin on due diligence efforts, their increasingly concentrated investments have helped support a trend toward private equity mega-funds.

Concentration at the top poses some challenges, but investors aren’t fazed: Since 2015, fewer investors have sought to make four or more fund commitments annually and more are gravitating towards making two to three fund commitments, perhaps suggesting an increase in ticket sizes, research firm Preqin found. The increased demand, as well as a need to reinvest capital from older private equity investments, and new players like sovereign wealth funds and wealthy individuals, have pushed dry powder held by private equity fund managers to a record high of $1.09tn as of
March 2018.

Private equity managers with good track records are in high demand, and those managers are increasingly able to find enough capital to scale their efforts to previously-unheard of levels, according Christopher Elvin, head of private equity products at Preqin.

“There looks to be a trend towards mega-funds,” Elvin told MMR. “The private equity industry is seeing huge inflows, but investors are increasingly choosing to sink their capital in the largest funds. LPs (Limited partners) prefer to be involved with fund managers that have been successful in the past – with the expectation that those fund managers will be able to generate large returns in the future – and generally fund
managers don’t tend to raise large funds without building up a track record.”

Read the full story: Institutional appetite drives a rise in PE ‘mega-funds

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LACERS remains indecisive on private equity

The Los Angeles City Employees’ Retirement System (LACERS) remains indecisive about how best to proceed with its 14% allocation to private equity, with one member of the investment committee suggesting looking for a wider pool of consultants before proceeding with interviews of the three finalists identified after a recent search.

The $17bn fund’s private equity program has been unsettled since July of 2017, when the board blew up an ongoing RFP process and started from scratch. At that time, a board member accused the incumbent consultant – and investment staff’s preferred option for a new contract – of fudging the performance numbers for private equity programs managed on behalf of other pension funds. Other pension fund clients stepped to the consultant’s defense, and the consultant explained its methodology in a later meeting, but the bad blood caused by the incident caused the consultant, Portfolio Advisors, to withdraw from consideration during a rebooted RFP process. Now, LACERS is once again on the verge of making a selection during the rebooted consultant search, and once again, some board members seem dissatisfied with the process.

Read the full story: LACERS remains indecisive on private equity

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Overuse of credit adds to PE crunch for pension funds

Public plan sponsors, already facing an overheated market for private equity investments, have to contend with a new obstacle in evaluating private equity managers and putting their money to work: the increasing use of credit lines.

General partners (GPs) are increasingly turning to subscription credit lines, which use limited partners’ (LPs) capital commitments as collateral to secure a line of credit from a bank, to fund acquisitions and delay calling on partners’ commitments. The approach began as a short-term tactic that benefited LPs, by giving them more time to meet cash calls instead of forcing them to pony up on a “just in time” basis. But institutional investors say the tactic has been expanded to delay capital calls in a way that could
inflate a private equity fund’s internal rate of return (IRR), making it more difficult for investors to evaluate potential partners and potentially triggering carried interest fees that would not have been warranted if the GPs put their partners’ money to work in a more timely manner.

“It’s like a baseball player taking human growth hormone and steroids — it can make an average player look terrific in terms of home runs, batting average, and slugging percentage,” David Fann, president and CEO of TorreyCove, a private equity and real assets consultant, told MMR. “It can make a mediocre fund look terrific on an IRR basis.”

Pensions are already feeling crowded out of private equity, with soaring demand for funds managed by top general partners. Entry prices for assets remain high, and dry powder has reached record levels — $906bn according to Preqin’s latest quarterly report on private equity, making for a challenging environment for managers looking to put capital to work. Credit only makes their jobs tougher.

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Investor profile: Washington State doubles down on private markets

The Washington State Investment Board (WSIB) is more committed to private markets than most of its institutional peers, recently allocating nearly half of its $120.4bn in assets to private equity, real estate and tangible assets.

The new allocation doubles down on Washington State’s already aggressive commitment to private markets, widening the gap with other public pension funds, most of whom favor higher targets for global and domestic public equity – asset classes that have offered high returns at relatively low costs since the 2008 financial crash.

CIO Gary Bruebaker acknowledges that Washington State is something of an outlier in its asset allocation strategy, but said the reason behind it is simple – Washington expects private markets to outperform public markets over the long term.

“Our since-inception [1981] return is 484 basis points higher than our public equity return,” Bruebaker told MMR. “Securing the financial future for over 400,000 public employees is the reason we invest in private markets.”

At its September meeting, the board approved a four-year asset allocation strategy that cuts its public equity target from 37% to 32% and uses those savings to increase real estate from 15% to 18% and tangible assets from 5% to 7%. The board left both fixed income and private equity unchanged, at 20% and 23%, respectively, but would have
committed more to private equity if it thought it could realistically achieve those goals, Bruebaker said.

Read the full story: Investor profile: Washington State doubles down on private markets

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LACERS private equity consultant defends itself before board

The Los Angeles City Employees Retirement System’s private equity consultant defended itself against accusations that it had skewed its performance numbers, telling the LACERS board that it had done its best to be transparent about all excluded performance data.

Portfolio Advisors was the incumbent and one of two finalists in LACERS’ recent search for a private equity consultant, and it expected to have its contract renewed, as LACERS staff recommended, at the July 11 meeting. Instead, the company found itself accused of puffing up its numbers through the exclusion of previous clients, and an especially large client, the Pennsylvania State Employees Retirement System. With doubts raised about the integrity of Portfolio Advisors and the thoroughness of the RFP process, the board canceled its RFP and decided to begin anew just as it reached the finish line (MMR, 7/14/17).

Portfolio Advisors returned to the board July 25, in what was scheduled to be a routine overview of recent private equity commitments (MMR, 7/24/17), and used the opportunity to defend its reputation.

“We left a very good footnote trail so there was no deception, and we followed the same consistent strategy that we used three years ago when we were hired,” said Brian Murphy, managing director at Portfolio Advisors. “Nothing changed from the way that we did it before. I was a little disappointed that having worked with you for three years, we got zero benefit of the doubt.”

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CalPERS grapples with its inconsistent reputation on private equity

The $323bn California Public Employees’ Retirement System (CalPERS) is taking a hard look at its reputation in the private equity world, hearing from expert panelists and internal staffers who describe the pension giant as an indecisive and unpredictable partner in private equity investments.

The pension fund is in the midst of a long-term review of its private equity strategy, which offers a chance for the board to “hear the best advice” and “clear our minds,” CIO Ted Eliopoulous said at the fund’s July 17 meeting. CalPERS has the scale and the expertise to be a real leader in private equity, Eliopoulos said, but a major hurdle is getting the board and staff to commit to a clear strategy for the asset class, something that’s been hindered by internal disagreements and staff turnover.

“We’ve wrestled with how to pursue alternative ways to invest in private equity,” Eliopoulos said. “We’ve always come up to the finish line and stopped short of really moving forward in any particular way with any scale or force behind it.”

Read the full story: CalPERS grapples with its inconsistent reputation on private equity

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