CalPERS To Trim Private-Equity Managers

Close on the heels of its elimination of its allocation to hedge funds last year, CalPERS announced on Tuesday it had also decided to slash the number of private equity managers it employs to drive down costs.

The largest U.S. pension fund said it would team up with other investors to drive down fees.

CalPERS to prune PE managers to 120 or fewer

In a story published today in Financial Times, CalPERS’ chief investment officer Ted Eliopoulos said the $292 billion pension fund could trim the number of managers it hires by two-thirds. He indicated that the fund was hoping to prune the number to 120 or fewer and the final number could fall below 100.

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Providing rationale for the pension fund’s move, Ted Eliopoulos said:” By having fewer managers, at larger scale, we will be able to reduce our overall costs.” He added: “We are looking at every possible lever to use to lessen the cost but make sure we still have access to the talent that we need.”

Ted Eliopoulos also touched upon the pension fund’s intention to look for other investors to team up with on certain investment strategies. With an aim to negotiate better deals from private equity managers, the pension fund would work with like-minded partners, whom it believes will be able to trim its costs over time.

The biggest U.S. pension fund’s investment committee will on Tuesday debate changing the benchmark for the performance of its private equity investments, to give it additional flexibility as it alters its portfolio. Stephen Foley of Financial Times anticipates the first casualties of such a review of managers would be “funds of funds”, which invest in a portfolio of private equity vehicles. These funds have been increasingly under criticism for adding an extra layer of fees while reducing the chances of outperforming the wider industry.

CalPERS’ PE returns trail its benchmark

CalPERS invests $31.2 billion, or about 10% of its portfolio, in private equity. In 2009, the Institutional Limited Partners Association, a group representing private-equity institutional investors, began pushing rules seeking to give clients more rights while reducing manager fees. CalPERS earned 18.4% in the fiscal year that ended June 30, thanks to global stock indexes rising to record levels. According to pension system’s data, the largest U.S. pension fund’s 10-year return on private equity of 13.3% as of June 30 fell short of its own benchmark by 2.1%. Moreover, the performance also missed in one-, three- and five-year periods.

As reported by ValueWalk last September, CalPERS signaled its plans to phase out its hedge fund investment operations, called the Absolute Return Strategies (ARS) program. The California Public Employees’ Retirement System’s decision to end the hedge fund investment program was a part of its ongoing efforts to reduce complexity and costs in its investment operations.