Derived from our Public Plan IQ solution, each month eVestment highlights the top news and activities of US public pension plans across their private markets programs.
The mid-year mark tends to be a time for companies to reflect on YTD activity and review progress on annual goals, and US public pension plans are no different. Over the last month, US public plans and their consultants met to review portfolio performance, asset allocations, market conditions and more. Using Public Plan IQ, we’ve “traveled” all across the US for you to offer a recap on a selection of these plans’ reviews, highlighting upcoming private equity manager searches and shifts in asset allocation in favor of private markets. You can view and access more plans’ private equity program reviews at the bottom of this post.
CalPERS – Private Equity Program, Semi-Annual Report – August 14, 2017 by Meketa
To be presented at the CalPERS investment committee meeting on August 14, 2017, Meketa has compiled a review of current private equity market conditions (deal activity levels, debt/ebitda multiples, exit activity and more) and a comprehensive review of the CalPERS private equity program and performance as of June 30, 2017.
This review supports CalPERS title as one of the largest and most prominent private equity investors: CalPERS has a PE portfolio of $25bn and total exposure of over $40bn, with an appetite for mega to large buyout funds (57% of CalPERS’ buyout exposure) targeting assets within the US (63% of CalPERS’ investments are assets within the US).
The semi-annual review by Meketa also reports that the CalPERS private equity portfolio has underperformed the policy benchmark across 1-,3-,5- and 10-year periods. The current CalPERS’ policy benchmark is a blended benchmark comprised of two-thirds weighting to the FTSE US TMI return and one-third to the FTSE AW ex-US Index return + 300 basis points, lagged by one quarter.
While news has been coming out of CalPERS board meetings that the institution may move to more co- and direct-investments, this review shows that fund investments have outperformed other investment structures across 5- and 10-year periods, while making up the lion’s share of exposure (66%). Over the 5- and 10-year periods, CalPERS fund investments portfolio outperformed the next closest structure by 1.4bps and 3.6bps respectively (for CalPERS, Meketa have calculated PE returns using a time-weighted return).
When dissected by geography, emerging markets have produced the strongest returns for CalPERS over a 10-year period, at 11%, but comprise just 13% of their private equity portfolio. Meketa report that the portfolio’s performance has been largely driven by investments in the United States.
CalPERS three commitments made in 2017 YTD have followed some of the top performing characteristics for the portfolio: large, predominantly US, buyout fund investments. It looks like CalPERS is continuing its trend of more capital with fewer managers, spreading over $1.5bn across these three funds alone.
No recommendations or actions were provided by Meketa in this semi-annual review.
Nebraska Investment Council – Asset Allocation Review – July 2017 by Aon Hewitt
Citing existing market conditions, Nebraska Investment Council’s consultant, Aon Hewitt, believe that meeting their assumed rate of return of 7.5% is likely to prove challenging with NIC’s current asset allocation mix.
Analysis by Aon shows that in comparison to other public funds (both above and below $5bn of AUM), NIC is overweight in stocks and core-plus fixed income, and underweight in private equity, real estate and hedge funds.
To aid NIC in constructing a realistic asset allocation that has a “better than average” chance of meeting the assumed rate, Aon has suggested the options of:
- Increasing global exposure in equities and away from domestic bias
- Separating the bond allocation into “risk reducing” and “return seeking” fixed income, with the latter being less liquid. Or,
- Reducing equities allocations in favor of increasing private equity and real estate.
In the third scenario, and also a version that blends all scenarios, a 10% allocation to private equity and real estate is expected. Currently, NIC’s commitment pace is $150m per year for private equity, but this would be expected to increase pending the asset allocation decision.
Los Angeles Fire & Police Pensions – Semi-Annual Review of Core & Specialized Manager Private Equity Programs, by Portfolio Advisors
Portfolio Advisors’ semi-annual review for Los Angeles Fire & Police Pensions (LAFPP) covers a comprehensive portfolio performance review for their private equity program, broken out into their core & specialized (emerging) managers programs, and also private equities commodities program. The review includes a detailed explanation of their criteria and appetite for the selection of specialized managers.
Appetite for private equity has grown with LAFPP – across all programs from 2010 through 2016, annual commitments have ramped from $265m to over $470m, and from 12 commitments per year to 25 commitments in 2016.
Private equity also received an increase in its allocation target, from 10% to 12% in June 2016. Outlined in this document is also the plans for 2017, which includes a goal of committing $425-475m from the portfolio to meet this exposure target.
Other key plans of Portfolio Advisors’ for LAFPP include:
- An emphasis on middle market buyout managers
- Selective investing in large buyout
- Selective investing in venture capital
- An emphasis on diversification and investment manager selection
PA is planning to seek approval for five to six commitments under their core program by year end, three commitments from their specialized program by year end and one to two commitments for their commodities allocation before year end.
Additional Semi-Annual Reports and Reviews
Other 2017 semi-annual report documents available in Public Plan IQ include the following. Clients can use the links below to access the full reports of these and all documents featured in this article.
- SFERS Private Equity Portfolio Update – https://publicplaniq.com/doc_pdfs/115334/
- Seattle Employees’ Retirement System Overview – RE & Infra – https://publicplaniq.com/doc_pdfs/115095/
- Plymouth Country Retirement Association – Private Markets Program – https://publicplaniq.com/doc_pdfs/115481/
- FPPA Colorado – Illiquid Alternatives Portfolio Construction Review – https://publicplaniq.com/doc_pdfs/115225/