By Paul
Mackintosh–Monday November 23, 2015
CalPERs, or the
California Public Employees’ Retirement System, is in the news again - something
that the US$292.18 billion pension giant probably wishes would happen less
often. As of "open book market values at market close on November 17,
2015" – minus one quarter's lag – private equity (PE) constitutes just
over 9.45% of that total value, at $2763 billion. This latest round of
headlines follows the appearance of representatives of its own PE team and
outside advisers before the CalPERS investment committee, during a day-long
informational workshop. In regard to the CalPERS PE programme, The Los Angeles
Times quoted CalPERS investment executive Eric Baggesen as saying that if PE
had been removed from its 2013 portfolio, CalPERS would either have had to deal
with a considerable increase in volatility or reduce its expected return by
0.25%.
Hold on: how much? If that is the kind of difference in returns that the world's seventh largest PE investor would have to digest not to play in the asset class, is it really worth the effort? Not that I'm arguing for CalPERS to retreat from PE, but it ought to give pause to any other more conservative pension fund (for example, in Japan) still wondering whether to resource up and take on investment teams to go into the asset class.
Especially in the light of reported comments from CalPERS programme director Réal Desrochers, and Marte Castanos, senior counsel at the plan. The former warned of "intense competition" to get into top-performing funds; the latter was quoted by Dan Primack in Fortune complaining that general partners (GPs) and their advisers often ride roughshod over confidentiality agreements and attempt to strong-arm limited partners (LPs) into accepting weaker terms based on prior (and confidential) partnerships with other funds, Why does CalPERS sit back and take it? Said competition, which weakens CalPERS' bargaining power against the GPs.
Competition to secure only an additional 0.25% return? From those numbers, this sounds like a somewhat flimsy argument, Not that I believe that tiny amount is the end of the story. But I do suspect that CalPERS, much criticised lately for its investment monitoring, is being a little too passive and defensive. Pension funds investing voters' savings surely have a stronger voice to sway regulators than CalPERS appears prepared to use. And GPs who presume that investors will come, come what may, might care to reflect whether newer institutions, especially Asian, that didn't grow up with the asset class, are going to accept PE's foibles and finagling forever. After all, what kind of argument is 0.25%, set against huge costs, fees, and institutional commitment, to persuade responsible fiduciaries?
Hold on: how much? If that is the kind of difference in returns that the world's seventh largest PE investor would have to digest not to play in the asset class, is it really worth the effort? Not that I'm arguing for CalPERS to retreat from PE, but it ought to give pause to any other more conservative pension fund (for example, in Japan) still wondering whether to resource up and take on investment teams to go into the asset class.
Especially in the light of reported comments from CalPERS programme director Réal Desrochers, and Marte Castanos, senior counsel at the plan. The former warned of "intense competition" to get into top-performing funds; the latter was quoted by Dan Primack in Fortune complaining that general partners (GPs) and their advisers often ride roughshod over confidentiality agreements and attempt to strong-arm limited partners (LPs) into accepting weaker terms based on prior (and confidential) partnerships with other funds, Why does CalPERS sit back and take it? Said competition, which weakens CalPERS' bargaining power against the GPs.
Competition to secure only an additional 0.25% return? From those numbers, this sounds like a somewhat flimsy argument, Not that I believe that tiny amount is the end of the story. But I do suspect that CalPERS, much criticised lately for its investment monitoring, is being a little too passive and defensive. Pension funds investing voters' savings surely have a stronger voice to sway regulators than CalPERS appears prepared to use. And GPs who presume that investors will come, come what may, might care to reflect whether newer institutions, especially Asian, that didn't grow up with the asset class, are going to accept PE's foibles and finagling forever. After all, what kind of argument is 0.25%, set against huge costs, fees, and institutional commitment, to persuade responsible fiduciaries?
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