All change at CalPERS

What can be read into developments at the bellwether pension fund.

Not for the first time, the private equity programme at the California Public Employees’ Retirement System is in the midst of a transformation.

As part of its asset liability management process happening throughout this year, the pension is considering moving its private equity allocation to sit in a “growth bucket” within a wider allocation to equities. At the moment CalPERS has a private equity allocation of 8 percent of its $315 billion in assets.

The thinking behind the potential change is that the private equity team would no longer be under pressure to reach a certain target allocation; instead it would be able to focus solely on committing to the best managers.

CalPERS managing investment director of asset allocation and risk management Eric Baggesen explained at the pension’s investment committee meeting on 17 April that there is an “inherent conflict” between committing a certain amount of capital to managers and identifying “the most skillful managers in the market place”. The proposed change is designed to let the team concentrate on identifying the managers and creating a “rational relationship with them”.

Importantly, the pension wants to avoid the situation where its negotiations with a manager are coloured by the knowledge of it being under- or over-allocated.

At the same time, if CalPERS merges its private and public equity allocations, it should create “a shared sense of responsibility and accountability” in trying to achieve its excess target return, added Baggesen. And as Ted Eliopoulos, chief investment officer at the pension, commented at a previous meeting, the merger would bring the private equity staff, which is currently siloed, into the portfolio construction big picture.

The other big transition, which CalPERS tells Private Equity International is unrelated to the changes in allocation, is the recent departure of Real Desrochers, who has served as the managing investment director for private equity for the past six years. Sarah Corr, an investment director in private equity, has stepped in as his replacement. While the pension has been clear that Corr is filling the role on an interim basis, CalPERS has not yet begun a search for a permanent successor.

Corr is well-known and -respected in the limited partner community. She is described by contacts variously as understated, experienced and competent. She has been with the organisation for 16 years and, according to two LP sources, has shifted her focus from hands-on portfolio management and fund selection in the early part of her CalPERS career to more research into portfolio risk management, asset allocation and more “strategic thinking”. This will no doubt serve her and the pension well as it works through the potential merger of its public and private equity allocations.

Whether Corr transitions from interim to permanent – or an external head of the private equity programme is sought – will depend on how the prospective merger of the private equity and public equity allocations pans out.

The question on the lips of the general partner community – certainly those among the 91 firms that CalPERS currently works with – is what the proposed changes will mean for its engagement with the asset class. For starters, the pension itself has said that private equity “remains integral” to its long-term success.

Looking at other pensions that consolidate their private and public equity allocations is only moderately instructive. In their presentation at this week’s meeting, Eliopoulos’s team pointed to Ontario Teachers’ Pension Plan, Canadian Pension Plan Investment Board and the New Zealand Superannuation Fund as exemplars. Private equity remains an important component in the portfolios of each; in particular the two Canadian funds have exposures of 17 and 21 percent respectively, while the New Zealand Super has a more modest 5 percent.

While CalPERS has been clear on its commitment to the asset class, the industry will be watching for another change further down the track; its potential move to bypass managers and invest directly in private companies – something OTTP, CPPIB and New Zealand Super all themselves do. As previously reported, CalPERS is exploring how it can overcome certain structural challenges to make this happen. As a spokeswoman for the pension told PEI back in January, this is a project for the “next few years”.