CalSTRS Leans Further Into Collaborative Model to Shrink Private Investment Costs

The storied investment program is about to get more sophisticated.


Illustration by II

After saving $1.6 billion since implementing its high-profile Collaborative Model in 2017, the California State Teachers’ Retirement System plans to focus on even more sophisticated cost savings efforts.

Years ago, the $307.9 billion pension fund developed a model to save on fees by bringing functions like public markets trading in-house and partnering with outside managers on co-investments and other lower-fee structures.

The program has been successful. The co-investment strategy alone saved CalSTRS $246.3 million in 2022. But the pension plan is developing the Collaborative Model further now that it is increasing its private investments.

At present, CalSTRS manages 85 percent of its fixed income portfolio, and 75 percent of the global equities book in-house. On the private markets side, the pension fund picks and chooses its battles. Rather than try to replicate the well known Maple 8 model, CalSTRS prizes partnerships, setting up separately managed accounts, co-investments, joint ventures, and taking minority or majority stakes in managers. The Maple 8 model has been used by the major Canadian pension plans since the 1990s and emphasizes direct investments, among other things.

CalSTRS’s board approved a new strategic asset allocation in the spring, moving four percent of its exposure from global equity to private credit, private equity, and infrastructure.

“As you’re moving from public to private, you’re going to be increasing your overall costs,” said deputy CIO Scott Chan. “The solution has been to extend the Collaborative Model into our form of direct investing into the private markets. We call this bending the cost curve.”

CalSTRS is now planning to boost its co-investments from its current target of 20 to 25 percent to 35 percent of the private markets portfolio. The pension also is moving toward what Chan calls more “sophisticated” joint ventures, revenue shares, and GP-stakes deals.

For instance, CalSTRS may invest with a fund, coinvest alongside the fund, and then also take a strategic stake in the firm itself. The retirement system has done that with Just Climate, an investment firm that aims to address the move toward Net Zero. This dovetails with the pension’s broader strategy of putting capital to work through a sustainable investing private markets sleeve. The sleeve sits between real estate and infrastructure, and as a result has a somewhat unique risk-return profile.

Inking these types of deals isn’t just about cutting back on fees paid, though. There is a return component, too. CalSTRS not only shares revenues with the managers it invests in, but it can help those managers improve performance.

“We’re in the business of producing the most return for the least amount of risk,” Chan said in an interview. “We want to be making the decisions that increasingly produce that return. We’re not pennywise pound foolish. It’s also about boosting returns.”

Much of the work involves serving as a good partner to managers, according to Chan.

“It could be easy for us to just, with a mountain of capital we sit on, we could have everyone come to us,” Chan said. “We really want to be the partner of choice to the degree that we want to be nimble and responsive to our partners.”

This means giving investment managers an answer on re-ups and other decisions quickly — often the same day they are asked. That, of course, requires board buy-in and delegated authority. CalSTRS also has a large enough team to manage these requests. But it’s not just responsiveness — it’s about choosing nascent, growing managers that CalSTRS can repeatedly fund.

“Speed and scale are the initial things,” Chan said. “As you go deeper, it comes down to trust and being able to grow together.”