California Pension Fund

CALPERS Cuts Funding to Buyouts 62% This Year

The California Public Employees’ Retirement System‘s reduction of private equity funding is a worrying signal from institutional investors.  CALPERS is the biggest American pension fund and its drastic reduction of capital allocation to private equity funds shows a strong distrust of the buyout industry.  In the first seven months of the year CALPERS has reduced cash investment with private equity funds by 62% to $2.23 billion.

Private equity funds are at a disadvantage to traditional investments and hedge funds, which are able to generate positive returns quickly.  Hedge funds have rebounded in 2009, taking advantage of a shaky market to have seven consecutive months of positive returns and six straight months of inflows.  Private equity funds, on the other hand, invest primarily long term and new deals may still take years to generate visible gains to investors.  For those deals that were made before or during the financial crisis, buyout firms have had to inject large amounts of capital to simply keep those portfolio companies afloat.  Investors will make their money when the portfolio firm has an initial public offering or is sold to another buyer but the IPO market is still struggling and there are few buyers interested in paying a reasonable price for a company in this economic climate.

So, investors have valid reasons to be nervous about investing in private equity funds.  Add the layer of management and performance fees and it is little wonder that CALPERS has reduced its payment to the industry.

Although the situation looks pretty grim it is important to realize that this shows a distrust of the industry and alternative assets as a whole, not a complete rejection of private equity.  CALPERS still allocated 2.23 billion to private equity firms through July which probably means that the investor is waiting to see if the industry can recover before committing more capital.  It is also part of a institutional investor push to change the limited-general partnership agreement to include more favorable terms for investors. The problem is that private equity firms need capital to start new funds to execute new deals and overcome the debt-laden investments bringing down many buyout firms’ portfolios. 

The California Public Employees’ Retirement System wrote checks for $2.23 billion to the firms through July, compared with $5.93 billion during the same period last year, according to documents prepared for Calpers’s investment committee meetings. Joseph Dear, Calpers’s chief investment officer, said he may extend his review of the plan’s “relationship” with Leon Black’s Apollo to other private-equity managers.

After contributing to the record $1.2 trillion raised by buyout funds this decade, many pensions, endowments and wealthy families suffered their worst losses last year. Now fund managers face mounting pressure from those investors, known as limited partners, to deploy cash more judiciously and rein in fees that transformed founders of the largest funds, Blackstone Group LP, KKR & Co. LP and Carlyle Group, into billionaires.

“You’re in a period where performance is poor and, particularly for the big guys, it’s coming home to roost,” said Steven Kaplan, [of] the University of Chicago Booth School of Business. “When performance is poor and money is scarce, the limited partners have the power.”  Source

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Tags: CALPERS, California Public Employees Retirement System, buyout, private equity CALPERS, california private equity investment, CALPERS buyout investment, CALPERS Private Equity Returns

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