Gilles MOUGENOT – March 2019
Calpers wants to increase its investments by 20 Billion dollars in Private Equity: good news?
The California Public Employees’ Retirement System, (CalPERS), one of the largest pension funds in the United States and in the world. The fund that has already 354 billion dollars of assets under management in 2018 has just announced its intention of increasing its exposure to Private Equity by 20 billion dollars.
This announcement did not remain without causing a certain number of comments whose overall tonality was overall positive.
Marcie Frost, her CEO, stated in June 2018 that the PE was the asset class whose performance had overshadowed all the others, with an average output over 20 years of 10,6%. Furthermore, she quoted an eminent expert who stated the following: “Private Equity is a tough business for funds… and in large part because you need it. You can’t quite walk away from private equity”.
Which patent of effectiveness, but at the same time let us try to analyse these intentions in more accuracy:
At CalPERS, PE only represents 7,9% of the funds under management, a figure that has been decreasing since the historic 12% 6 years ago. One of the reasons behind this disengagement is the scandal related to Fred Buenostro, its chief executive officer between 2002 and 2008, who had been sentenced in 2016 to 4 and half years in prison for corruption with a PE funds investor. An investor who was none other than Albert Villalobos, a former member of the board of directors at Calpers.
In those six years, CalPERS had invested nearly 4.4 billion dollars with this fund particular fund (Apollo Global management).
This announcement could consequently only to make up for the time lost at CalPERs, which compared to its competitors falls behind, as some reached 15% or more for their PE funds under management.
However, is this attempted recovering even possible and under which circumstances will it be carried out?
The opportunities are limited, fisrtof all, due to its size CalPERS will be largely constrained to invest in a small number of PE funds. As a reminder, the 5 largest funds were in 2018, searching for 200 billion $ to raise and from those firms, the top 10 raises accounted for 40% of the full amount raised in the world.
Competition is increasing when yields are decreasing. However, it is about clear that these mega funds are confronted with an increasingly strong competition and increasing multiples. Both of which will inevitably cause a decrease of the expected return. It is therefore, difficult to hold the speech that the past performances of the PE will carry on in the same way. To quote Mark Twain: “it ain’t what you don’t know that gets you into trouble. it’s what you know for certain that just ain’t true” in other words: anybody who believes that the ratio risks /reward is better today than in 2009 is mistaken!
The solution: establishing its own investment vehicles and financing them yourself. To avoid falling into this skew and to answer the criticism made to the PE for (i) its lack of transparency, (ii) the amount of paid fees (estimated at 700 million $ in 2018 by CalPERS) and (iii) the difficulties of controlling those organisations, CalPERS decided to create 2 investment vehicles called Innovation and Horizon with the following characteristics:
The initiative illustrates the main parts of the problems faced by PE funds:
This announcement which displays the triumph of the PE, also underlines subliminally its difficulties
The future and the return on investment will be the judges of this!