California-Based Public Pension Funds Activity within Private Equity – November 2015

by Matthew Rautionmaa

  • 17 Nov 2015
  • PE

The US Securities and Exchange Commission (SEC) recently announced that it will enforce further regulations on private equity fund managers regarding investor fees and expenses. This action will put more pressure on fund managers to disclose all fees and charges, thereby increasing transparency and improving the LP-GP relationship.

Public pension funds, one of the largest investor types within the private equity asset class, could benefit from the actions of the SEC. California is home to some of the largest pension funds in the US and this blog will take a closer look at the private equity investment behaviour of these key players.

Preqin’s Investor Intelligence database currently tracks 30 California-based public pension funds that invest in private equity. Currently, these 30 investors have approximately $68.9bn allocated to private equity, with an average allocation of $2.5bn, or 7.3% of their total assets. The overall private equity capital allocated is set to increase, as the average target allocation of these investors is approximately $2.8bn or 9% of total assets. Furthermore, over a quarter (27%) of these pension funds have plans to invest in the asset class in the next 12 months.

California Public Employees' Retirement System (CalPERS) is the largest investor in the private equity asset class among all US-based public pension funds, with $27.8bn allocated, approximately 9.4% of its total assets. However, unlike the overall trend of California-based public pension funds, CalPERS has been reducing its allocation to private equity over the course of 2015, as well as consolidating the managers it invests with. It is also interesting to note that CalPERS is in the process of implementing a new reporting system to improve the tracking of fees and expenses paid to private equity fund managers; a new measure to protect themselves against overcharging.

Co-investments allow an LP to invest in underlying companies alongside a GP and have the added benefit of lower fees. This added incentive is especially beneficial in the current private equity market, where some LPs may feel they are being overcharged for fees and expenses. However, acquiring co-investments rights can be difficult. Currently, 30% of California-based public pension funds will consider private equity co-investments. The SEC’s action toward transparency of fees and expenses may have an impact on pension funds’ co-investment behaviour, as well as their overall private equity strategy.

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