Calpers signal ‘appetite’ to increase bets on private equity

CalPERS, America’s largest public pension plan, is considering a bigger bet on private equity despite growing fears that higher interest rates will reduce industry returns.

The $442 billion-in-asset retirement fund, one of the world’s largest investors in private equity, will begin a comprehensive review of its holdings in the sector next month, Chief Executive Markie Frost said, adding that to increase it ” Hunger” is allocation.

The review of CalPers’ $52 billion private equity portfolio comes nearly nine months after Nicole Musicko, who started last year as chief investment officer, said the pension plan’s private equity program had been expanded over a decade between 2009 and 2018. was stopped for Its cost is up to $18bn.

“If we (Calpers’ board) were confident that we could put more money into private equity, the appetite is there from an investor perspective (and) from an investment office perspective,” Frost told the Financial Times. “It will be part of the asset allocation review.”

Frost’s comments come at a time when many investors are concerned about returns from the private equity industry, which has sucked up trillions of dollars in wealth over the past decade.

The sector now faces very high debt financing costs, a deteriorating global economic outlook and concerns about the potential for “stale” valuations relative to public markets. Last year, the chief investment officer of Danish pension fund ATP compared the private equity industry to a pyramid scheme.

Frost said that there was “much debate” about private equity valuations, but believed that the methods used by Calpers to value portfolios were sound and the fact that private equity valuations are typically only done every quarter. used to be reviewed, this was not a major issue for the Fund.

“I don’t believe there is a problem with quarter lag on valuations, it really comes down to the processes that are used (for valuations),” she said. “Our processes are pretty good. . . we have had them done by outside agencies.

At the start of the 2022/23 financial year, Calpers raised its target allocation to private equity from 8 per cent to 13 per cent. If the review gives the green signal then it can increase further.

Frost also said that the fund is “looking at opportunities for more deal flow” in private debt following the collapse of Silicon Valley Bank and other lenders, and that the fund was willing to take on more risk to profit from such positions.

“Based on the current tightness in the banking industry, there are opportunities we can pursue,” he said.

“We’re in a place where we have liquidity, we have a lot of dry powder that we can use,” she said. “So we think as long as we have the appropriate underwriting, this is an opportunity even in a distressed environment.”

His comments come after a turbulent period for the banking sector, with Signature Bank and First Republic in the US as well as Swiss lender Credit Suisse being taken over by rival UBS.

The Federal Reserve this month warned of a “sharp contraction” in credit. Large private equity firms such as Blackstone, Apollo Global and KKR are looking for ways to increase their exposure to private debt.

Frost said the fund was designed to take on additional risk that private debt investments could involve.

“Without taking some risk, you are not going to get 6.8 per cent (annual target of the scheme) returns in the long term,” he said.