Should You Follow CalPERS & Temasek Holdings Into Private Markets? A Look Into The Potential Benefits

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Key Takeaways:

  • CalPERS is leaning into private markets despite expected short-term valuation declines.
  • Temasek Holdings has reduced its public equities exposure from 80% to 47% over the last 13 years.
  • Both institutions believe that private markets offer potentially greater returns over public markets on a long time horizon.
  • Private market investments have potential benefits but come with their own sets of risks.

The Shift of CalPERS Towards Private Markets

CalPERS, the $468.3 billion pension fund, is showing a clear trend: it’s moving towards private markets. Nicole Musicco, their CIO, has been vocal about the opportunities they see in the private sector, despite challenges in real estate and potential valuation drops. She’s stated unequivocally that “We think the private market area is a great space for us to lean into.”

Why the private market?

  1. Positive Momentum in Infrastructure: CalPERS sees potential growth, particularly in the infrastructure sector.
  2. Private Equity Changes: Although there’s pressure on private equity valuations, there’s a silver lining. These managers are returning capital, signaling a preparation for raising new funds.
  3. Co-Investments: CalPERS sees a chance to cut fees by increasing co-investments. This method promises better returns compared to more traditional funds.
  4. Venture Capital Increase: CalPERS is setting its sights on venture capital, despite expecting some write-downs in the sector.

Temasek Holdings: An Evolving Investment Strategy

Temasek Holdings, once a holding entity for Singapore’s state companies, has transformed into an investment giant backing startups and leaning into private markets. CEO Dilhan Pillay Sandrasegara emphasizes the company’s active approach, differing from passive asset managers. He highlighted his positive view on private markets by stating: “Returns on private investments outstrip the returns in public investments over a longer timeframe.”

Temasek’s Transition Points:

  1. From Public to Private: Over a span of thirteen years, Temasek reduced its public equities from 80% to 47%. Now, the private market constitutes 53% of its holdings.
  2. Belief in Better Returns: Pillay has mentioned that returns from private investments have, over longer timeframes, outpaced those from public investments.
  3. Geopolitical Considerations: Temasek is cautious about investing in areas impacted by U.S.-China tensions, preferring to avoid sectors that could lead to geopolitical complications.
  4. Innovation and Low Interest Rates: The move towards the U.S. and Europe is influenced by these regions’ innovation-friendly economies and the prevailing low-interest-rate environment.

What This Means for Individual Investors

When giants like CalPERS and Temasek move, they often set trends. The shift towards private markets suggests potential opportunities that individual investors might consider.

  • Diversification: Investing in private markets can offer diversification, potentially leading to risk mitigation in one’s portfolio.
  • Potential for Higher Returns: As highlighted by both institutions, the long-term return potential in private markets can be significant.
  • Stable Valuations: Unlike public markets that can swing daily, private market valuations are often more stable, shielding investors from short-term volatility.
  • Not Without Risks and Challenges: Investing in private entities does have its challenges and individual investors must still do their due diligence, which can be challenging when you don’t have the same resources as institutional investors.

Historically, only large institutional investors like CalPERS and Temasek could easily tap the private markets. But now with platforms specializing in bridging the gap for individual investors, and the recent regulatory flexibility of the SEC, more individuals can access private market investments than ever before.

Today there is a wide choice of platforms that can enable access to private markets, with some specializing only in one asset class and other alternative investment platforms that provide individual investors access to a myriad of asset classes from hedge funds and private equity to Pre-IPO companies. The choices are numerous so it’s worth doing your diligence on both the platforms and their products.

Common Questions

Q. Why are private markets considered less volatile?

Private markets aren’t subject to the daily fluctuations of the stock market. This means their valuations remain relatively stable over shorter time frames. This can help avoid panic selling and make returns less lumpy.

Q. How can individual investors access private markets?

Through venture capital funds, private equity funds, or even some specialized investment platforms and even some mutual funds and ETFs that focus on private enterprises.

Q. What are the risks associated with private market investments?

They can be illiquid, meaning you might not be able to cash out when desired. Additionally, startups and private firms can fail, leading to potential losses.

Q. How do geopolitical factors impact private market investments?

Geopolitical tensions can affect cross-border investments, trade relations, and can result in regulatory changes. Investors need to be aware of the larger global context when investing in private markets.

Q. What’s the primary advantage of co-investments as highlighted by CalPERS?

Co-investments, done alongside established PE firms and funds, can lead to reduced fees and potentially greater returns.

Considering your investment strategy and appetite for risk, diving into private markets might be the next step in diversifying and strengthening your portfolio. But you shouldn’t do it just because a few of the largest institutional investors are doing it–like all investments, due diligence and research in the context of your unique investment circumstances are key.