Calpers signals ‘appetite’ to increase bets on private equity

Calpers, the biggest US public pension plan, is considering bigger bets on private equity despite growing fears that higher interest rates will curb the industry’s returns.

Chief executive Marcie Frost said that the $442bn-in-assets retirement fund, one of the world’s biggest investors in private equity, will start an extensive review of its holdings in this sector next month, adding that there is “appetite” to increase its allocation.

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

“If we [the Calpers board] had conviction that we could put more money into private equity, the appetite is there to do it from an investor perspective [and] from the investment office’s perspective,” Frost told the Financial Times. “That’ll 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 in trillions of dollars of 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 lagging those of public markets. Last year the chief investment officer at Danish pension fund ATP compared the private equity industry to a pyramid scheme.

Frost said that there was “a lot of debate” about private equity valuations, but believed the methods used to value Calpers’ portfolio were sound and the fact that private equity valuations were generally only reviewed every quarter was not a major issue for the fund.

“I don’t believe that there’s a problem with the quarter lag on the valuation, it really comes down to the processes that are used [for the valuation],” she said. “Our processes are quite sound . . . we have those done by outside entities.”

Despite the challenges buyouts firms are facing, some investors are increasing their bets on the asset class in a bid to profit from cheaper valuations. Some of the best performing private equity returns were generated in the wake of the dotcom crash and the global financial crisis, according to PitchBook data.

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

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

“Based on current tightening in the banking industry, there are opportunities that we could pursue,” she said.

“We are in a place where we have liquidity, we have a lot of dry powder that we can put to use,” she added. “So we think that as long as we have the appropriate 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 in the US also both collapsing and ailing Swiss lender Credit Suisse being taken over by rival UBS.

The Federal Reserve this month warned of a “sharp contraction” in credit. Big private capital firms such as Blackstone, Apollo Global and KKR have been exploring ways to increase their exposure to private credit.

Frost said the fund was prepared for the extra risk that private debt investing could involve.

“You’re not going to get the returns of 6.8 per cent [the scheme’s annual target] long term without taking on some risk,” she said.

Additional reporting by Will Louch