CalPERS Is Ready to Do Its Own Private Equity Deals

Private equity has been the pension’s highest-returning asset class for the past 20 years.

Photo: CalPERS

Photo: CalPERS

California Public Employees’ Retirement System, the largest pension fund in the U.S., wants to reap the benefits of doing its own private equity deals.

The pension said May 17 that it’s exploring a plan to create CalPERS Direct during the first half of next year, a new business model that would allow it to make direct private-equity investments as opposed to contributing capital to funds that do so.

CalPERS expects it will have as much as $13 billion invested in private equity annually, for a 10 percent allocation in its portfolio.

Private equity has been the fund’s highest-returning asset class for the past 20 years, with a 10.6 percent annual gain, according to the statement. CalPERS Direct, which requires approval from the pension’s board, would allow the pension giant to avoid paying private equity firms fees that erode gains.

“We need to think differently about how we invest so that we can generate the returns that we need,” said Marcie Frost, CalPERS chief executive officer, in the statement. “Our members and employers need us to be focused on strong risk-adjusted returns and growing our funded status, and this approach does just that.”


[II Deep Dive: Eliopoulos Out at CalPERS]

The California pension manages $349 billion of assets that provide benefits for 1.9 million members in its retirement system. CalPERS Direct would create two funds, one focused on late-stage investments in technology, life sciences, and health care, and another that would make long-term investments in established companies.

CalPERS’ investment office is beginning talks with professionals in the private equity industry about the makeup of independent advisory boards and management teams that it would form under its plan.

“Our investment team has spent months exploring options in order to design an approach to private equity that takes advantage of our size and brand,” Ted Eliopoulos, CalPERS chief investment officer, said in the statement. “We believe it will drive stronger private equity returns and help achieve economies of scale over time.”