The USD 155 billion public pension fund for full-time faculty and educational administrators in the state of California has announced its investment plans for the next 12 months. CalSTRS currently has USD 21 billion allocated to the asset class which is slightly above its target allocation to private equity which lies at 12% of total assets. It has approximately 70% of its private equity program allocated to buyout funds, 15% to distressed debt and mezzanine funds, and 15% to venture funds. Geographically, 75% of the pension fund’s commitments have been made to US-focused funds, with the remaining 25% allocated to vehicles focusing on international opportunities.
Its investment philosophy over the next 12 months focuses on a long-term ‘bottom-up’ approach. It places the most emphasis on the quality of investment partners that have a proven track record and where there is a strong alignment of interests. Investment staff, along with a private equity consultant, will examine the potential of investing in certain private equity investment structures to improve fund governance and potentially lower fees (separate accounts). Such investments are not currently permitted and therefore, if approved, may result in a change of investment policy over the next year.
As well as a core focus on ‘bottom-up’ approaches, CalSTRS will also focus more on key ‘top-down’ approaches than it has in previous years. The pension fund plans to place more emphasis on human resources as the ratio of investment staff to assets under management and partnerships is not currently maintained at an optimum level. The pension fund hopes to complete and RFP for a private equity investment consultant and hire two additional staff members for the private equity team to ease the workloads of current employees. In addition to this, CalSTRS also hopes to improve the capabilities of its internal operations. Due to more rigorous and complex rules with regards to reporting, accounting and compliance requirements, the pension fund plans to have additional resources within this function. Finally, CalSTRS Credit Enhancement Program, located within the private equity department, will continue to monitor public finance markets very closely and hopes to maintain the number of commitments in this area. It will only make additional commitments if the proposed are of very high quality.
CalSTRS is also dedicating more resources to its co-investment programme. CalSTRS believes that co-investments can improve the overall returns of the fund because they provide no fee or carry structure with deals, offer increased exposure to potential higher risk and higher reward deals, allow the fund to achieve strategic goals within certain industries such as cleantech and finally co-investments allow the fund to forge a closer relationship with GPs and to view and monitor how GPs conduct their business on a more intimate level.
The overall aim of the public pension fund is to return USD 10 billion from July 2010 to the end of June 2011. Within the private equity department, staff will focus on finalising a two to four year investment program with target numbers of investments per year within CalSTRS various strategies and geographies. The fund hopes to hire additional staff members as well as an investment consultant to help manage the workload. The pension fund will look to reduce fees and governance by exploring alternative investment structures and continuing the growth of its co-investment program. Finally, it hopes to improve its ‘top-down’ approaches and will remaining highly cautious with regards to its Credit Enhancement Program commitments.