The California Public Employees’ Retirement System board on Monday approved a plan to increase the fund’s target allocation to private assets to 40% from 33%, in a bid to maximize returns from the portfolio’s highest-performing asset classes.
The plan, which continues a private-asset strategy implemented under former CIO Nicole Musicco, raises the fund’s target for private equity to 17% from 13% and the target for private debt to 8% from 5%. Both PE and private debt allocations will have a policy range of +/- 5%. Additionally, CalPERS will decrease the policy target for public equities to 37% from 42% and for fixed income to 28% from 30%.
The new private debt policy will have a range of 20% to 100% for direct lending and a 0% to 40% policy range for specialty lending, real estate financing and mortgages. The new policy will remove liquidity financing and private structured products from the fund’s investment strategy
As of January 31, CalPERS had $68.7 billion in private equity assets and $12.3 billion in private debt, representing 14.2% and 2.5%, respectively, of the fund’s $482.9 billion total assets.
Why Now?
CalPERS found in a mid-cycle asset allocation review completed this month that the private equity asset class provided the highest expected long-term return for the fund.
Private equity in the CalPERS portfolio had a 10-year annualized return of 11.8%, as of June 30, 2023. Public equities had an annualized return of 8.9% for the same period. Fixed income and real assets returned 2.4% and 7.7% annualized, respectively.
The last time CalPERS approved a new asset allocation was in late 2021. Effective July 2022, that plan increased the fund’s allocation to private equity to 13% from 8% and added a private debt strategy that made up 5% of the portfolio.
CalPERS re-evaluates its asset allocation every four years during its asset-liability management review, with a mid-cycle asset allocation review occurring during each period. The next asset-liability management review is scheduled for 2025.
Too Little, Too Late?
CalPERS’ previous CIO, Musicco, who left the fund in September 2023, had a strong background in private assets, having been head of private equity funds and co-investments at the Ontario Teachers’ Pension Plan and head of private markets at the Investment Management Corp. of Ontario.
Musicco criticized CalPERS’ slow pacing into private equity in a September 2022 board meeting: “If we take a sharper look at our private equity program, really this era between 2009 and 2018 was a period of time when we really stopped committing our pacing, our commitment to the program overall. It was really put on hold.”
Musicco noted in the same meeting that the fund lost out on a private equity boom during that period because of its private equity pacing. “It’s estimated anywhere from $11 to $18 billion, and that’s just because of inconsistent capital deployment.”
CalPERS scaled back its private equity allocation in the 2021 asset-liability management review “due to limited implementation capacity,” according to the mid-cycle asset-liability management review, published Monday.
According to PitchBook, CalPERS’ returns between 2008 and 2018 lagged those of its peers in almost every asset class, with private equity lagging the most.
The years of 2022 and 2023 were difficult for private equity returns across the board, as many general partners are holding onto portfolio companies for longer, a result of sky-high valuations in 2021. Since 2021, private equity deal value has declined 60%, deal count has declined 35% and exit value has declined 66%, according to Bain & Co.
According to the CalPERS board, it expects to name finalist candidates for the CIO position by the end of March.
Related Stories:
CalPERS’ New Asset Allocation Kicks In July 1
CalPERS’ Private Equity Allocation Remains Nearly $7B Under Target in Q3
CalPERS CIO Nicole Musicco Will Step Down
Tags: California Public Employees’ Retirement System, CalPERS, Nicole Musicco, private assets, Private Credit, Private Equity