California Public Employees' Retirement System (CalPERS) has issued an RFI detailing its intention to form a new investment vehicle targeting domestic private equity managers. The USD 237.6 billion public pension fund is the largest in the US, both in terms of total assets and amount of capital allocated to private equity. It currently has USD 33.4 billion allocated to the asset class, with a total of USD 54.9 billion in commitments. This makes it just above its target allocation of 14% of total assets, with 14.1% currently allocated to private equity, which is significantly more than the average US-based public pension plan. Preqin’s Investor Intelligence database tracks 256 US-based public pension funds with an interest in private equity, and they have aggregate assets under management of over USD 2.95 trillion. The average allocation of all US-based public pension funds to private equity currently stands at 6.4% of total assets, with the average target allocation being 7.7%.
CalPERS accesses the private equity asset class through is Alternative Investment Management (AIM) Program, the purpose of which is to diversify and enhance the returns of the retirement fund. Through this program, CalPERS has issued an RFI for investment in emerging domestic private equity managers. The RFI details its intention to establish a New Investment Vehicle (NIV) which will target new partnerships within the US, that may have limited funds under management but that have potential to deliver superior, risk adjusted, rates of returns. It is expecting to access funds with risk adjusted returns that are in the top quartile of private equity partnerships. When judging if a vehicle will deliver superior risk adjusted returns the NIV will look to factors such as the experiences of the individuals in the team and the underlying investment strategies.
It is likely that the NIV will be structured as a customized fund of funds vehicle, a structure that CalPERS has previously utilized to gain access to specific fund types and geographies. For example the 2007 vintage fund, ESP Golden Bear Europe Fund, managed by SL Capital Partners was established exclusively for CalPERS to target small to mid-market buyout funds in Europe. The underlying vehicles CalPERS gains exposure to through the NIV may in the future become part of its core AIM program.
The pension fund is looking to hire a manager to manage the NIV and expects the term of the relationship to be seven to ten years, with the investment period covering four to six years. CalPERS is also looking at potentially making direct commitments to the underlying funds in the NIV with no fee and no carry. According to preliminary estimates, CalPERS private equity portfolio returned 25.3% in the year up to March 2011.