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Calpers Is Not in Danger of Breaking Up With Private Equity – New York Times

Calpers Is Not in Danger of Breaking Up With Private Equity – New York Times

By William Alden

Any investment decision by the California Public Employees’ Retirement System, the nation’s biggest pension fund with about $300 billion in assets, is closely watched by investors around the world.

So an article in The Financial Times on Monday that said Calpers planned to reduce the number of private equity firms anaging its capital had investment professionals buzzing.

But Calpers is not planning to significantly reduce its allocation to private equity, though it may redistribute it, Joe DeAnda, a Calpers spokesman, said in an email. He said the pension fund may increase its allocation to individual private equity managers as it culls the number of managers.

As of October, Calpers had $31.2 billion invested in private equity, or about 10.5 percent of its overall portfolio, according to the most recent disclosure. It aims to have 10 percent of its portfolio allocated to the strategy.

The Financial Times article, which said Calpers was hoping to cut its number of private equity managers by more than two-thirds, to 120 or even below 100, caused a stir in large part because of a decision by Calpers last year regarding its investments in hedge funds. The pension fund said at the time that it would get out of hedge funds entirely, citing the complexity and cost of the strategy.

When it comes to private equity, Calpers is also trying to reduce costs. But its approach is more subtle.

Réal Desrochers, the pension’s head of private equity since 2011, announced in late 2013 that Calpers aimed to reduce the number of managers to as few as 100. (DealBook reported on it here.)

In a presentation to the Calpers investment committee in December that year, Mr. Desrochers discussed his review of the pension fund’s private equity portfolio. It included 389 managers at the time.

“I think this portfolio should have — given the size where we are — it should be probably around 100, 120, something like that,” Mr. Desrochers said. (See the 29:15-minute mark in this video.)

Despite the fees charged by private equity and the lackluster investment performance in recent years, pension funds are generally not decreasing their private equity investments, market participants say. The strategy has done better than stocks over a 10-year period, and many pensions see it as adding an important element of diversification.

Andrea Auerbach, a managing director at Cambridge Associates, which advises institutional investors like pension funds, said she was worried about the opposite problem: too much money flowing into private equity. An abundance of capital could put downward pressure on returns, she said.

A number of factors are causing pension funds to continue to invest in private equity. One is that the private equity managers, after selling their holdings, have been returning large amounts of capital to the pension funds. This often leads the funds to reinvest in private equity to maintain a certain allocation target.

For 2014, investors in private equity are projected to receive $125 billion to $130 billion, according to Cambridge Associates. That would beat 2013’s total distributions of $124 billion, which itself was higher than the 2012 level of $115 billion.

“It’s like Tetris,” Ms. Auerbach said. “The capital just keeps coming.”