Calpers, the largest public pension plan in the United States, is considering bigger bets on private equity despite growing concerns that higher interest rates will dampen industry returns.
CEO Marcy Frost said the $442 billion pension fund, one of the world’s largest private equity investors, will begin an extensive review of its holdings in the sector next month, adding that there is an “appetite” to increase its investments. distribution.
The Calpers’ $52 billion private equity portfolio will be reviewed nearly nine months after Nicole Musico, who started as investment director last year, said a decision to suspend a pension plan’s private equity program for a decade between 2009 and 2018 cost him up to $100,000 in revenue. to $18 billion.
“So we [the Calpers board] We had the conviction that we could invest more money in private equity, the desire to do so from an investor perspective [and] From the investment desk’s point of view, Frost told the Financial Times. “This will be part of the asset allocation review.”
Frost’s comments come as many investors worry about returns from the private equity industry, which has sucked trillions of dollars out of assets over the past decade.
The sector now faces much higher debt financing costs, a worsening global economic outlook and concerns about the possibility that “outdated” valuations lag behind those of public markets. Last year, the chief investment officer of Danish pension fund ATP compared the private equity industry to a pyramid scheme.
Frost said there was “a lot of controversy” about private equity valuations, but he believed the methods used to value Calpers’ portfolio were sound and that the fact that private equity valuations were generally only reviewed quarterly was not a major issue for the fund.
“I don’t think there is a problem with the quarter delay in the evaluation, it really comes down to the processes that are used [for the valuation]She said. “Our operations are completely sound . . . we have those that have been done by outside entities.”
Despite the challenges that acquisition companies face, some investors are increasing their bets on the asset class in an effort to take advantage of cheaper valuations. Some of the best-performing private equity returns have been generated in the aftermath of the internet meltdown and global financial crisis, according to PitchBook data.
At the start of the 2022/23 fiscal year, Calpers increased its target allocation to private equity from 8 percent to 13 percent. This could go up further if the revision gives the green light.
Frost also said the fund “sees more deal-flow opportunities” in private debt in the wake of the collapse of Silicon Valley Bank and other lenders, and that the fund is willing to take on more risk to capitalize on such positions.
“Based on the current tightening in the banking industry, there are opportunities we can pursue,” she said.
“We’re in a liquidity place, and we have a lot of dry powder that we can use,” she added. “So we think as long as we have the right underwriting, this is an opportunity even in a distressed environment.”
Her comments come after a turbulent period for the banking sector, with Signature Bank and First Republic also in the US collapsing and struggling Swiss lender Credit Suisse being taken over by rival UBS.
The Federal Reserve warned this month of a “sharp contraction” in credit. Major private capital firms such as Blackstone, Apollo Global and KKR are exploring ways to increase their exposure to private credit.
Frost said the fund is prepared to take on the additional risks that an investment in private debt may entail.
You will not get 6.8 percent returns [the scheme’s annual target] in the long run without risk.
Additional reporting by Will Loach