Calpers reports ‘appetite’ to ramp up private equity bets

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Calpers, the largest public pension plan in the United States, is considering bigger bets on private equity despite growing fears that higher interest rates could dampen sector returns.

Chief Executive Marcie Frost said the $442 billion pension fund, one of the world’s largest private equity investors, will begin a broad review of its holdings in this sector next month, adding there is “appetite.” to increase its allocation.

The review of Calpers’ $52 billion private equity portfolio will take place nearly nine months after Nicole Musicco, who started as chief investment officer last year, said the decision to suspend the pension plan’s private equity program for a decade between 2009 and 2018, it had cost as much as $18 billion in returns.

“If we [the Calpers board] was convinced that we could invest more money in private equity, there is an appetite to do so from an investor perspective [and] from an investment department perspective,” Frost told the Financial Times. “It will be part of the asset allocation review.”

Frost’s comments come as many investors worry about the returns on the private equity sector, which has gobbled up trillions of dollars in assets over the past decade.

The sector is now facing much higher debt financing costs, a deteriorating global economic outlook and concerns about the potential for “stale” valuations to undercut public markets. Last year the chief investment officer of the Danish pension fund ATP likened the private equity industry to a pyramid scheme.

Frost said there has been “a lot of debate” about private equity valuations, but he believes the methods used to value Calpers’ portfolio are robust and the fact that private equity valuations are generally only reviewed every quarter is not a big deal. big problem for the fund.

“I don’t think there’s a problem with the quarter lag on the assessment, it really depends on the processes that are being used [for the valuation],” she said. “Our processes are quite robust … we have those done by external entities.

At the start of the 2022/23 financial year, Calpers increased its target allocation for private equity from 8% to 13%. This could further increase if the review gives the green light.

Frost also said the fund “is seeing more business flow opportunities” in private debt following the collapse of Silicon Valley Bank and other lenders, and that the fund was prepared to take more risk to profit from those locations.

“Based on the current tightening in the banking sector, there are opportunities we could pursue,” he said.

“We’re in a place where we have liquidity, we have a lot of dry powder that we can put to good use,” he added. “So we think as long as we have the appropriate underwriting, this is an opportunity even in a struggling environment.”

His comments come after a turbulent time for the banking sector, with Signature Bank and First Republic in the US also collapsing and struggling Swiss lender Credit Suisse being bought out by rival UBS.

The Federal Reserve this month warned of a “severe contraction” in credit. Large private equity firms such as Blackstone, Apollo Global and KKR were exploring ways to increase their exposure to private credit.

Frost said the fund was prepared for the additional risk investing in private debt could entail.

“You will not get 6.8% returns. [the scheme’s annual target] long-term without taking any risk,” he said.