CalPERS board approves increased exposure to private markets

March 20, 2024 (Preqin News) – The Board of CalPERS has agreed to increase allocations to private markets from 33% to 40% of its portfolio.

The fund, which agreed the new allocation weightings at a meeting on Monday, will increase targeted exposure to private equity from 13% to 17%. Allocations to private debt will increase to 8%, up from 5%. Debt strategies were the fund’s highest-performing private asset segment in 2023, generating a one-year return of 13.3%.

The increased exposure to private markets – which would mean an extra $33bn allocated to alternatives based on latest AUM of $483bn – comes as CalPERS also trims its targeted public equity allocation to 37% of the portfolio from 42% previously.

Large pension funds have been steadily increasing their exposure to private markets in recent years. Allocations to alternatives in the world’s seven largest pension markets – representing 91% of total pension assets – have almost doubled over the last 20 years, from 11.7% in 2003 to an estimated 20.1% at the end of 2023, according to a report from the Thinking Ahead Institute.

In a recent survey of LPs conducted by Adams Street Partners, two-thirds of LPs said they plan to increase private market allocations, while 90% believe that private markets will outperform public markets in the coming year.

Private equity was CalPERS’ top-performing asset class in the 10 years to 2023, with an 11.8% annualized return. Of its targeted allocation to private equity, 65% will be deployed to buyout strategies – which posted a 12.7% return over the last 10-year period – while 25% will be allocated to growth/expansion strategies.

According to Preqin data, of the current $3.8tn of global private capital dry powder, a record high, over a quarter ($1tn) is destined for buyout strategies. Meanwhile, ‘slowdown in private equity exit volumes has weighted on the amount of capital that some LPs have available to deploy’, Meketa Investment Group, CalPERS private equity consultant, found upon reviewing the portfolio.

The US’ largest public pension fund, which represents over 2.2 million Californian public employees, increased allocations to private equity strategies for the first time since 2016 in 2021, up from 8% to 13%. It surpassed this target allocation in 2023 ‘due to a blend of better-than-anticipated relative returns and accelerated success in scaling the lower-cost deployment strategy,’ the report highlights.

CalPERS estimates that the targeted increase to private market allocations will grow returns by 10bps, which represents a material increase of $480mn. CalPERS also updated their regional diversification figures, with 70% of their portfolio weight now targeted to North America, followed by EMEA at 16%, and APAC at 12%.

In November, Norway’s $1.6tn sovereign wealth fund (SWF) asked government permission to allocate to private equity, saying that an ‘increasingly larger share of global value creation takes place in the unlisted market.’ The SWF’s proposal for a 5% allocation to private equity would equate to $80bn.

_{The opinions and facts included in the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin accept no liability for any decisions taken in relation to the above.}