CalPERS’ New Private Markets Strategy

Most of this year’s fundraising news has focused on a slowdown in activity and a bigger-than-usual lift for investors hoping to close their latest funds. While it’s true that many limited partners have been tapped out, there’s one allocator that evidently has a lot left in the tank: Calpers.

Originally published in the December 18th edition of Transacted.

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Through June of this year, filings show the California Public Employees’ Retirement System has committed more than $14 billion to 2023 vintage alternatives strategies across private equity, venture capital, private credit, and real assets.

That’s included nearly $1 billion to TPG, $830 million to Crosspoint Capital, $750 million each to Brookfield and IFM, $703 million to Permira, and more than half a billion each to Hellman & Friedman, Leonard Green, Francisco Partners, CD&R, General Catalyst, and Bain Capital, among others.

Andreessen Horowitz, Silver Lake, CapVest, Vitruvian, Patient Square, and Welsh Carson have all bagged more than $250 million.

What’s Going On?

Calpers believes its $466 billion portfolio is underallocated to private markets, based on benchmarking to peers and a returns profile that’s outperformed the fund’s other investments.

On the back of those returns, Calpers is expected to adjust its target private equity allocation in March from 13 to 17 percent, and its private credit from 5 to 8 percent.

The fund also noted it was “very possible” the portfolio’s target would be upped again within the next two years.

There may be even more to come after that. “I can't say that that's not something that [we would consider],” said interim Chief Investment Officer Dan Bienvenue when asked about an eventual 30 percent private equity allocation.

I would not rule that out, because I do think again, if you look at the capital market assumptions, private equity is our highest returning asset class, and it's got all those really attractive characteristics.

Dan Bienvenue on a 30 percent private equity allocation

Calpers also justifies a greater focus on private markets through what it calls its multiplier effect. Their thinking is that, on top of investment returns, Calpers-driven in-state investment contributes an additional $42 billion of economic activity across California.

Their analysis points to the direct effects of increased output, the indirect demand generation from investment recipients, and the induced effects of greater household spending as incomes grow.

The statistics make for pleasant reading, though the actual incremental impact of greater private markets allocations probably doesn’t drive quite as much uplift as the annual Calpers for California report claims.

The reality is that, while Calpers’ commitments do certainly help, many of the California-based deals receiving their capital would still have happened even without their commitment. GPs pursue deals based on their perceived best use of capital, meaning if a California deal is good, they’ll go after it. If not, they won’t. More cash in investors’ hands likely has only a marginal impact on ultimate proceeds received by California-based companies.

Whatever the real logic, a more direct interpretation of the stats makes for better investment committee talking points. Asked if further increases in private markets allocation would drive even greater in-state job creation and economic activity, Interim CIO Bienvenue didn’t hold much back…

Yes, we think that as we lean into private markets that will actually add more activity in California. And that's for two main reasons.

Number one, private markets tend to be smaller companies, and smaller companies tend to be the largest employers of companies in this country. So as we add private assets, we think that we're actually going to add sort of overall employment improvement. And that will be our impact. And of course ours is a small impact. It's a big industry. But as we add private assets, we think that we're generally adding to employment.

Secondly, much of the private assets, specifically private equity, especially in the growth and venture areas and as we diversify that part of the portfolio, much of that is in California, so again, that too would sort of underscore our impact in California.

Investment Committee Open Session, November 13, 2023

The Lost Decade

Perhaps the biggest driver of Calpers’ current private markets excess is their belief that they dropped the ball once before.

Coming out of the financial crisis, Calpers dramatically reduced private equity and venture allocation, fearful of the perceived greater risk profile and illiquidity. Annual commitments from 2009 to 2018 averaged $2.7 billion—for context, 2022’s commitment was $13.6 billion.

An internal analysis presented in September 2022 showed that a decade of underinvestment in alternatives led to what staffers have now dubbed “the Lost Decade.” That decision, they say, drove between $11 - $18 billion of lost value for Californians.

Allocations in recent years have focused on playing catch-up, returning the portfolio’s private markets share to where it should be, and ensuring the same mistake isn’t made again. The pension fund says its long-term goal is to hit private equity commitments of around $15 billion per year.

The Alternatives Strategy

Calpers wants its upcoming capital commitments to further its broad ESG goals, including a proposed 2050 Net Zero Plan focused on tackling portfolio emissions. For investors looking to lock up future funding from Calpers, expect GP environmental reporting and climate risk assessments to be key diligence focus areas.

Alongside its new commitments, Calpers is also looking at opportunities to backfill old vintages (that Lost Decade). The fund is planning to pursue the purchase of secondary stakes across private equity, real estate, credit, and infrastructure.

For future deployment, co-investment is top priority. Currently sitting at 24 percent of private markets activity, Calpers’ investment committee wants to increase its utilization of fee-free, carry-free opportunities to put a damper on compensation paid out to managers. While it’s a strategy that’s not necessarily ideal for investors, Calpers could become a viable option in deals needing a sizeable equity check to get across the finish line.

The Upshot

Calpers is navigating a period of internal uncertainty following the resignation of Chief Investment Officer Nicole Musicco in September, just 18 months into the role. Even so, absent an abrupt change in leadership philosophy, the current private markets emphasis appears to be a high-conviction part of the fund’s overall strategy for the foreseeable future.

For those investors who’ve historically shied away from public pension LPs (thanks to their publication of closely-held fund performance metrics), the prospect of a hefty commitment from Calpers could be changing the calculus in today’s environment.

Sam Hillier

Sam Hillier is a reporter at Transacted covering private equity and investment banking. He previously spent time as an investment professional focused on direct buyouts, as well as an earlier strategic advisory stint.