Calpers, the largest U.S. public pension plan, is considering a bigger bet on private equity, despite growing concerns that higher interest rates will dampen the sector’s returns.
The pension fund, with $442 billion in assets, is one of the world’s largest private equity investors and will begin a broad review of its holdings in the sector next month, Chief Executive Marcie Frost said. , adding that people are “interested” in increasing their holdings. distribute.
The review of Calpers’ $52 billion private equity portfolio will come nearly nine months after Nicole Musicco, who started as chief investment officer last year, said she would put the pension plan’s private equity program on hold for a decade between 2009 and 2018. The cost was as high as $18 billion in return.
“If we (the Calpers board) are convinced that we can put more money into private equity, there is an interest in doing so from an investor’s perspective (and) from an investment office perspective,” Frost told the FT. “This will be part of the asset allocation review.”
Frost’s comments come as many investors worry about returns in the private equity industry, which has absorbed trillions of dollars in assets over the past decade.
The industry now faces higher debt financing costs, a deteriorating global economic outlook and concerns that “stale” valuations may lag public market valuations. Last year, the chief investment officer of Danish pension fund ATP compared the private equity industry to a pyramid scheme.
Frost said there is “a lot of debate” about private equity valuations, but he thinks the methodology used to value Calpers’ portfolio is sound, and the fact that private equity valuations are typically only reviewed quarterly is critical for the company. Funds are not a major problem.
“I don’t think there’s a problem with the quarterly lag in the valuation, it really comes down to the process (of the valuation) being used,” she said. “We have very well established processes . . . We have those that are done by outside entities.”
Calpers raised its target allocation to private equity from 8% to 13% at the start of the 2022/23 financial year. This could rise further if the review is given the green light.
Frost also said the fund “sees more opportunity for deal flow” in the private debt space following the collapse of Silicon Valley Bank and other lenders, and that the fund is ready to take more risk to profit from such positions.
“Based on the current tightness in the banking sector, we can pursue opportunities,” she said.
“We’re in a place where we have liquidity and we have a lot of dry powder that we can use,” she added. “So we think that, even in the midst of adversity, as long as we have proper underwriting, this is an opportunity.”
Her comments come after a turbulent period for the banking sector, with the collapse of Signature Bank and First Republic in the US and the takeover of ailing Swiss lender Credit Suisse by rival UBS.
The Fed warned this month of a “sharp contraction” in credit. Large private equity firms such as Blackstone, Apollo Global and KKR have been exploring ways to increase their exposure to private credit.
Frost said the fund is prepared for the additional risks that private debt investments may involve.
“You’re not going to get a long-term return of 6.8 per cent (the scheme’s annual target) without taking some risk,” she said.