CalPERS to commit $22bn to private equity

CalPERS is expecting to deploy the $22 billion in unfunded commitments of its alternatives investment management program in the next two to three years, with greater concentration among the best performing managers one of the priorities for 2010.

In a presentation to the board scheduled for next week, Leon Shahinian, senior investment officer, alternative investment management outlined the challenges and priorities for the fund which include developing a co-investment policy framework and plan, and pushing for better terms and conditions in partnership agreements.

It will also emphasise contrarian or opportunistic investments, buying good assets from distressed sellers.

Some of the challenges outlined in the presentation include avoiding becoming a private equity index as the program grows, its heavy weighting in large/mega buyouts, limited ability to rebalance due to the depressed secondary market conditions, its resources nearing capacity and how to take the special programs to the next level.

As outlined in its interim asset allocation report, CalPERS plans to increase its alternative investment management program from 13 to 14 per cent in the next year. At the end of 2009 it had a market value of $24 billion invested in the asset class, with unfunded commitments of $22 billion.

It aims to deploy those unfunded commitments in the next couple of years, in what it describes as a promising period for private equity, noting the best private equity investments have historically been made on the heels of recessions.

At the end of 2009 the breakdown of that exposure was 57 per cent in buyouts, 10 per cent in distressed credit, 10 per cent in expansion capital, 2 per cent in secondaries, 10 per cent in venture capital, and 8 per cent in other which includes fund of funds, special situation and mezzanine debt.

The majority, 68 per cent, is invested in the US, although the fund also has exposures in Europe (17 per cent), Asia (9 per cent), Canada (2 per cent) and other (4 per cent) including South America, Israel, Africa and the Caribbean.

The special programs allocation aims to generate returns commensurate with private equity asset class by investing in less efficient or high-growth market niches. These include a $600 million allocation to clean energy and technology, $1 billion to an emerging manager program, $1 billion to the California initiative – all of which are fully committed – and a $700 million allocation to healthcare investment.

The AIM program returned -6 per cent for the year to December 2009, versus its benchmark of -4 per cent, but over three, five and 10 years it is well ahead of its benchmark, outperforming by 2, 3 and 2 per cent respectively.