CalPERS Private Equity

CalPERS Will Continue to Invest In Private Equity

The California Public Employees Retirement System represents a huge pool of potential capital for private equity funds. It has invested large portions of its $180 billion in assets–the largest pension fund in the nation–in private equity and hedge funds over the years but major losses during the recession have caused some to question the logic of these investments. Despite criticism, CalPERS will likely still invest in private equity. This shows a larger trend of the large institutional investors trying to make up for big losses by investing their money with riskier but often more rewarding private equity firms.

CalPERS lost almost $60 billion last year and its new head of investments, Joseph A. Dear, hopes to make up for some of those losses by continuing to invest in alternative assets. Although its private equity holdings are down some 31% (still less than its real estate losses of 35%) Mr. Dear believes that alternative investments can still produce big returns.

Mr. Dear remains a believer. Private investments, he asserts, will over the long haul outperform stocks by three percentage points a year, and that is necessary to keep Calpers on track to returning its goal of 7.75 percent annual returns. “Three percent on a portfolio as large as ours makes a material difference,” he said. Source

Dear has a reputation for daring investments in private equity. He invested more of his portfolio (25%) in private equity than any other fund when he headed the Washington State public pension fund. The decision panned out well with the Washington State Investment Board, which manages $67 billion in assets reaching the top 1% of its peers in terms of performance. Since then the fund has suffered big declines though, losing 27% of its value.

Most recently, Mr. Dear headed the Washington State public pension fund, which gained a reputation as a daring investor under his oversight. It risked more of its portfolio — 25 percent — on private equity than any other public fund. The bet pushed the Washington State Investment Board, which now has $67 billion in assets, into the top 1 percent of its peer group in performance during the boom years, according to Wilshire Associates. But in the fiscal year that ended last month, the fund lost 27 percent of its value, or $18 billion.

In contrast, CalPERS may withdraw from investing in venture capital, at least that’s the impression California controller John Chiang gave in a recent interview. Mr. Chiang sat down with veteran venture capitalist Michael Mortitz of Sequoia Capital to discuss how the pension funds are doing and what he sees for its future. He intimates that he will re-evaluate his funds’ investments in alternative assets and the venture capital 2% management and 20% performance fee structure will have to be reconsidered. The California Public Employees Retirement System is a huge institutional investor and its push away from alternative investments means a significant loss of capital for venture capital funds.

Michael Moritz interviews Mr. Chiang in the following video:

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