CalPERS Boosts Direct Co-Investments to 35% of Private Equity Programme

The California Public Employees' Retirement System will increase the share of direct co-investments in its private equity programme to 35% over the next five years, up from 18% today, the $500bn fund's board confirmed at its quarterly meeting on Monday. This shift is forecast to reduce blended fees on the PE book by approximately 95 basis points annually, equivalent to nearly $500m of saved fee load at current AUM levels. The move is part of a broader overhaul announced by CIO Marcie Frost, who has been working to optimize the fund's private equity programme.

The implementation of this new strategy will not involve bringing origination fully in-house. Instead, the fund is doubling the size of its co-investment team to 24 professionals. This expansion is intended to enhance the fund's ability to identify and pursue attractive co-investment opportunities, while also strengthening its relationships with general partners. By increasing the size of its co-investment team, CalPERS aims to improve its deal sourcing capabilities and negotiate better terms with its partners.

CalPERS is also signing wider partnerships with five "anchor GPs" that will provide preferential co-investment rights in exchange for larger primary commitments. The list of anchor GPs includes prominent firms such as Blackstone, KKR, and Carlyle. These partnerships are designed to provide CalPERS with priority access to co-investment opportunities, allowing the fund to invest directly in companies alongside its general partners. In return, CalPERS will make larger primary commitments to the funds managed by these anchor GPs, deepening its relationships with these partners and securing more favorable terms.

The decision to increase direct co-investments is a significant one for CalPERS, as it seeks to reduce its reliance on traditional fund investments and lower its fee burden. By investing directly in companies, CalPERS can avoid paying management fees and carried interest to general partners, potentially saving hundreds of millions of dollars in fees over time. This move is also consistent with a broader trend among large institutional investors, who are seeking to increase their control over their investments and reduce their costs.

The shift towards direct co-investments is also likely to have implications for CalPERS' relationships with its general partners. By taking a more active role in co-investing, CalPERS may be able to negotiate better terms and more favorable conditions with its partners. This could include securing greater transparency, improved governance, and more robust reporting requirements. At the same time, CalPERS' increased focus on direct co-investments may also lead to a reduction in the number of traditional fund investments it makes, potentially altering the dynamics of its relationships with certain general partners.

From a capital allocation perspective, the increase in direct co-investments is likely to have significant implications for CalPERS' private equity programme. The fund will need to ensure that it has the necessary resources and expertise to support its expanded co-investment activities, including a larger team and more sophisticated infrastructure. CalPERS will also need to carefully manage its relationships with its general partners, balancing its desire for greater control and lower fees with the need to maintain strong partnerships and access to high-quality investment opportunities. As the fund navigates this transition, it will be important for it to closely monitor its progress and make adjustments as needed to ensure that its private equity programme remains aligned with its overall investment objectives.

The move by CalPERS to increase its direct co-investments is a significant development in the evolution of the fund's private equity programme. Under the leadership of CIO Marcie Frost, CalPERS is seeking to create a more efficient and effective private equity programme, one that is better aligned with the needs and goals of its beneficiaries. As the fund continues to implement its new strategy, it will be important to watch how this shift towards direct co-investments plays out, and what implications it may have for the broader private equity industry. The experience of CalPERS may serve as a model for other institutional investors, who are also seeking to optimize their private equity programmes and reduce their costs.

CalPERS' decision to increase its direct co-investments is also likely to have implications for the private equity industry as a whole. As one of the largest and most influential investors in private equity, CalPERS' actions can have a significant impact on the market. The fund's move towards direct co-investments may lead to increased competition for co-investment opportunities, potentially driving up prices and altering the dynamics of the market. At the same time, CalPERS' increased focus on direct co-investments may also lead to a greater emphasis on transparency and governance, as the fund seeks to ensure that its investments are aligned with its values and goals.

In conclusion to the analysis of CalPERS' private equity strategy, the shift towards direct co-investments is a key component of the fund's broader overhaul. The move is expected to reduce fees, increase control, and improve alignment with the fund's investment objectives. As CalPERS continues to implement its new strategy, it will be important to monitor its progress and assess the implications for the private equity industry. The experience of CalPERS may serve as a model for other institutional investors, who are also seeking to optimize their private equity programmes and reduce their costs, and the private equity industry as a whole will be watching the developments with interest.