Capital Markets

CalPERS Backs Away from Alternative Investing

Like many institutions, the nation's biggest pension fund seems to see this as a time for "streamlining," a new report says.
Stephen TaubNovember 19, 2008

In the teeth of the financial crisis, many institutional investors have scaled back their alternative investments, including private equity, venture capital, and hedge funds. To the list of wary institutions, now add CalPERS.

The California Public Employees’ Retirement System (CalPERS), the nation’s largest pension fund, said it recently sold 26 percent of its private equity fund interests. A calculation from Prequin, a group that compiles information about alternative assets, shows that the selloff includes interests in 74 funds, leaving CalPERS’ total portfolio standing at 288 funds overall. The net asset value of funds sold is $1.9 billion, or 9 percent of its overall portfolio.

Prequin said in its report on CalPERS, which now has $21.5 billion in its private equity portfolio: “This indicates that CalPERS is seeking to streamline its portfolio and focus on a smaller number of larger fund commitments.”

Prequin said that the majority of fund interests sold ranked in the third and bottom quartiles of private equity benchmarks, although the sale did include some top performing funds.

Included mainly were venture funds from 2000 and 2001, it said, noting that the activity “indicates a shift away from venture funds.” Altogether, 54 percent of the funds sold were venture funds, with 27 percent being buyouts, and 19 percent from other fund types.

The biggest fund interest sold was a $500 million commitment to Global Innovation Partners — a top quartile fund which is showing a 31.6 percent internal rate of return. The median IRR for funds sold is minus-0.5 percent.

The best performing fund interest sold was in Doughty Hanson Fund II, a buyout fund of vintage 1995 with a net IRR of 46.3 percent. The worst performing fund interest sold was in American River Ventures I, a 2001 vintage fund with net IRR of minus-27.7 percent.

“In selling part of its private equity portfolio” back in the first quarter, “it is likely that CalPERS gained a better price for its fund investments than it would have achieved in the current market where private equity funds are trading at a significant discount to net asset value,” said Etienne Paresys, head of performance for Prequin. “This secondary sale was aimed to focus CalPERS relationships on the best performing managers, and it is therefore not surprising that CalPERS is abandoning most of its venture funds of vintage 2000/2001, with funds of this era being severely hit by the technology crash. As with many other investors, it is likely that CalPERS has liquidity issues and it will be interesting to see if it will need to re-enter the secondary market in the near future.”