Marching Orders for the Next Investment Chief of CalPERS: More Private Equity

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Marching Orders for the Next Investment Chief of CalPERS: More Private Equity

Marcie Frost, the chief executive of CalPERS, said that Mr. Meng’s departure would not prompt the board to change CalPERS’s investment strategy. She said a study by CalPERS and its outside consultants showed that private equity and distressed debt were the only asset classes powerful enough to boost the fund’s overall average gains up to 7 percent a year, over time.

“So we have to have a meaningful allocation to those,” she said. “There are no guarantees that we’re going to be able to get 7 percent in the short term or, frankly, in the long term.”

Data shows that CalPERS’s private equity returns are consistently lower than industry benchmarks, but private equity has still performed better than other assets and “has generated billions of dollars in additional returns as a result of our investments,” said Greg Ruiz, CalPERS’s managing investment director for private equity.

Mr. Meng was a big proponent of private equity, telling trustees that “only one asset class” would deliver the returns they sought and that the fund would need to direct more money into it. But while CalPERS sought, under him, to increase its private equity allocation to 8 percent of total assets, the holdings fell to 6.3 percent, in part because the private equity managers were returning money from previous investments and CalPERS did not jump to reinvest it. Over all, the fund had about $80 billion — or 21 percent of its assets — in private equity, real estate and other illiquid assets as of June 30, the end of its last fiscal year.

CalPERS has sometimes moved slowly on private equity partly because of its trustees’ qualms.

At one recent meeting, Ms. Taylor, the investment committee chair and formerly a senior union official, recalled that some of CalPERS’s private equity partners had bought Toys “R” Us in 2005. The transaction loaded it up with $5 billion in debt just as the retailer’s bricks-and-mortar sales strategy was becoming antiquated, and the company went into a long, slow collapse that ended in liquidation and cost more than 30,000 jobs.

“I’m hoping that we can get to a better strategy of mitigating some of these problems,” she said.

Other trustees questioned the validity of the internal benchmark that CalPERS uses to evaluate its private equity investments, saying they didn’t believe the returns were all that good after fees were deducted.

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