The United States’ largest pension fund sees harder times ahead for private equity investments — an outlook that will lead CalPERS to further slash managers in hopes of working with a small group of only the best managers, on the best negotiated terms.
“We anticipate it may be moving from a gusher to a garden hose and then maybe even a trickle,” Wylie Tollette, chief operating investment officer of the $305 billion California Public Employees’ Retirement System, said this week in a telephone interview.
The bleaker cash-flow outlook for private equity adds to uncertainty at Calpers and other pensions facing shrinking gains as they strive to meet future obligations. The private-equity industry, which makes long-term investments such as leveraged buyouts in operating companies, shows signs of coming off its best years after distributing a record $443 billion to global clients in 2015, according to Preqin.
Now investments are shifting to early-stage pools that throw off less cash. At the same time, buyouts, the majority of Calpers’s private-equity portfolio, are rising in cost as firms with an unprecedented $1.47 trillion in stockpiled cash, known as dry powder, compete for acquisitions — a trend that could further crimp returns.
The pension’s private-equity holdings earned 1.7 percent in the fiscal year ended June 30, the weakest performance since 2012. Over 20 years it’s been the strongest asset class, with annualized returns of 11.5 percent, compared with 7 percent for the full portfolio.
More comments on the ideal number of PE managers, from Bloomberg:
The pension slashed the number of managers it uses to about 100 from more than 300 in 2014, according to Tollette, the investment executive. Its goal is 30 managers by 2020, with a focus on advantageous terms from top firms.
“We want to negotiate fees very aggressively around larger allocations to fewer managers,” he said. “The key in private equity is really selecting the best managers, because if you select the average manager, you’re going to underperform.”