Calpers’ $63.5 billion-plus private equity portfolio is significantly trailing its benchmark, according to investment consultant Meketa, following a move by the pension to increase its PE allocation earlier this year.
But the move could still put it on track to meet its long-term goals.
Meketa attributed the underperformance to the fact that private market returns tend to lag those of public equities—a phenomenon that has left many PE-heavy portfolios reeling from public market declines in 2022. Calpers’ PE allocations trailed their benchmark by 14.5% over the one-year period that ended on June 30, according to materials Meketa presented at the fund’s Sept. 16 investment committee meeting.
Private equity funds, on average, began to feel the effects of public market declines in H1 2023. From Q2 2022 to Q2 2023, PE funds’ rolling one-year horizon IRRs—a measurement of their estimated profitability—fell over 40%, according to PitchBook’s Q4 2023 Global Fund Performance report.
Over that same time period, buyout funds estimated profitability dropped 37.5%. Buyout strategies represent nearly two-thirds of the net asset value of Calpers’ PE portfolio and carried its overall performance, followed closely by growth investments.
The performance news comes just months after Calpers voted to increase its PE allocation as part of a strategic plan to lower costs and increase long-term performance. In March, the $491 billion pension voted to increase its PE allocation to 17%, up from 13%, and shave off a few percentage points from its targeted exposure to public equities.
The idea was to prioritize co-investment deals, which typically have low-to-no management fees.
In Monday’s memo, Meketa made clear that, despite shorter-term underperformance, the pension is still on track to meet the long-term 17% target and that investment staff has focused on increasing allocations to co-investments, mid-market buyout, growth equity and venture managers.
At the same time, Calpers’ most recent performance data does not yet factor in PE’s slight stabilization in recent quarters. In the back half of 2023, PE funds saw an uptick in performance as managers scrambled to get deals done before the end of the year, according to PitchBook data.
While the recovery has continued into 2024, median PE fund returns at the seven largest publicly-traded asset managers—namely Blackstone, KKR, Apollo, Carlyle Group, Ares, TPG and Blue Owl—continue to trail the public market by a wide margin, according to PitchBook’s US Public PE and GP Deal Roundup report.
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