Preqin Tells Private Equity to Heed the “Power of the Limited Partner” After CalPERS’ Cuts


Research firm Preqin has released a note reacting to CalPERS’ cutting of private equity managers.

The firm notes that limited partners are beginning to wield more negotiating power, and cautions private equity firms to consider CalPERS’ actions an “effective statement” on the power of limited partners.

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Private equity fund managers should take heed of the California Public Employees’ Retirement System’s (CalPERS) overhaul of its allocation to the asset class and focus on justifying the terms they present to clients, according to Preqin.

The research firm was responding to last week’s announcement by CalPERS that it wanted to drastically reduce the number of private equity managers it uses in order to cut costs.

“The decision by CalPERS may not immediately result in a drop in overall commitments to private equity funds,” Preqin said in a research note, “but serves as an effective statement to fund managers on the importance of justifying fund terms, as well as the power of the limited partner.”

The research firm said CalPERS’ decision reflected a wider concern among investors that fees were the biggest challenge to their investment in private equity. Roughly 58% of respondents to Preqin’s survey of US public pensions said fees were their chief concern.

It’s important to note that CalPERS is not cutting its allocation to private equity, only the number of PE managers it employs.

Preqin’s research note can be found here.


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Pension Shortfalls Felt By Police Departments As Hiring, Retainment Becomes More Difficult for Cities


Pension obligations have strained police departments across the county as they weigh ways to cut costs without hurting the quality of their force.

But sound solutions are hard to come by as benefit cuts make it harder to recruit and retain good officers.

By the same token, mounting pension obligations make it more unlikely cities will spend money on hiring new officers even as department numbers dwindle.

From Bloomberg:

The shortfalls in the 25 largest state and local-government pensions have tripled over the past decade to more than $2 trillion, according to Moody’s Investors Service. Those gaps, which persist even as the stock market reaches record highs, have mayors scrapping plans to increase patrols and reopen precincts as they spend more on retirement instead.

In cities that cut benefits, officers have quit or retired, underscoring the challenge of balancing the promises of the past with the duties of the present.

“The difficulty you run into when you have minimal staffing is there’s less proactive time that an officer can spend on community-oriented policing,” said Brian Marvel, president of the police union in San Diego, where the number of officers has dropped by 200 since 2009. “There are officers out there doing great work every day. They’re just not doing as much of it.”


The diminished force in San Diego, which has declined to 1,850 sworn officers from 2,050 five years ago, mirrors a national trend: There were about 390,000 police officers nationwide in 2013, down 14 percent from four years earlier, according to the Federal Bureau of Investigation’s most recent figures.

Rebuilding police ranks is crucial to preventing their standing in communities from slipping even more, said George Kelling, a senior fellow at the Manhattan Institute for Policy Research, a New York nonprofit that studies techniques for making police more effective at reducing crime.

“Community policing is very labor intensive, and if you want to get out into the community, you have to have the resources,” said Kelling, who helped develop law-enforcement tactics adopted in New York. “Most cities ought to be viewing policing as an investment rather than a cost.”

San Diego’s police force isn’t only declining in terms of officers employed; the force has become less experienced, as the average officer only has 6 years of police experience, according to Bloomberg.


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CalPERS Is Cutting Its Private Equity Managers, But That Doesn’t Mean It’s Breaking Up With PE


CalPERS announced this week that it was cutting down the number of private equity managers it employs – possibly by as much as two-thirds.

The change comes in the name of cutting costs. A similar rationale was used when the pension fund decided to exit its entire hedge fund portfolio last year.

But unlike hedge funds, private equity will remain a significant part of CalPERS’ investment strategy going forward.

From the New York Times:

Calpers is not planning to significantly reduce its allocation to private equity, though it may redistribute it, Joe DeAnda, a Calpers spokesman, said in an email. He said the pension fund may increase its allocation to individual private equity managers as it culls the number of managers.

As of October, Calpers had $31.2 billion invested in private equity, or about 10.5 percent of its overall portfolio, according to the most recent disclosure. It aims to have 10 percent of its portfolio allocated to the strategy.


When it comes to private equity, Calpers is also trying to reduce costs. But its approach is more subtle.

Réal Desrochers, the pension’s head of private equity since 2011, announced in late 2013 that Calpers aimed to reduce the number of managers to as few as 100. (DealBook reported on it here.)

In a presentation to the Calpers investment committee in December that year, Mr. Desrochers discussed his review of the pension fund’s private equity portfolio. It included 389 managers at the time.

“I think this portfolio should have — given the size where we are — it should be probably around 100, 120, something like that,” Mr. Desrochers said. (See the 29:15-minute mark in this video.)

In other words, this move has been in the making for a long time.

CalPERS allocates about 10 percent of its assets towards private equity.


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CalPERS Looks to Cut Two-Thirds of Private Equity Managers

cutting a one dollar bill in half

As part of its quest to reduce overall costs, CalPERS announced on Monday that the fund would be cutting the number of private equity managers it employs.

The cuts could be deep – the pension fund currently has 291 such managers, but that number could fall to below 100.

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Eliopoulos told the Financial Times he would use “every possible lever” to cut costs, and indicated that the number of managers CalPERS uses for private equity could fall below 100, from 291 currently. He voiced a desire to team up with other investors on big deals

“By having fewer managers, at larger scale, we will be able to reduce our overall costs,” Eliopoulos said.

However, there are no signs to indicate that CalPERS will reduce its overall exposure to the asset class, as it has with hedge funds. Eliopoulos said he wanted to “make sure we still have access to the talent that we need”, and the pension is currently advertising for a portfolio manager for its Sacramento, California-based private equity team.

The decision to create a more concentrated portfolio reflects a growing trend in the sector: Larger, established managers are finding it much easier to raise cash for new funds than newer players.

Recent research from Preqin showed that funds launched last year by managers new to the private equity sector accounted for 7% of the $486 billion raised in 2014, the same proportion as in 2013.

CalPERS invests about 10 percent of its portfolio in private equity.


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Video: State and Local Pension Reform – Can We Cut Costs and Improve Retirement Security?

This panel discussion, held by the Urban Institute, talks about pension reform at the state and local level. What do they mean for retirement security? And is there a way to cut costs for government without jeopardizing retirement security?

Panelists include researchers from the Brookings Institution, the Center for Retirement Research and the Urban Institute.


Cover photo by Matthias Ripp via Flickr CC License