The $328bn US pension fund CalPERS is considering making its own direct private equity investments

Lucy White
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A direct investment strategy would help CalPERS neatly sidestep the fees payable to private equity fund managers (Source: Getty)

The largest public pension fund in the US, the California Public Employees' Retirement System (CalPERS), has announced that it will consider making direct investments in private companies.

This would be a major shift in strategy for the scheme, whose current investments are worth $327.77bn, as it would be the first time such a fund has committed to run its own direct investment strategy.

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The pension scheme currently has $25.9bn invested in private equity, through funds based across the globe.

“I think CalPERS is right to think that they can't continue with the current model,” said Ludovic Phalippou, a private equity specialist at Oxford University's Said Business School.

“Interests are not aligned between them and the private equity fund managers, while fees are high and not particularly related to performance.”

In the current low interest rate environment, he added, fees would be biting a lot more.

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Many investors in private equity have become increasingly active in co-investing, committing capital alongside a private equity fund to increase exposure to a particular company.

A direct investment strategy could be seen as the next logical step, neatly sidestepping the fees payable to private equity fund managers for both management and performance.

CalPERS chief investment officer Ted Eliopoulos said he would recommend the fund “explore setting up a separate vehicle” for direct investments and expand the current co-investment programme, although he added this could take as long as 20 years.

But rather than just being a smooth continuation of CalPERS' existing strategy, a move into direct investment would take a huge amount of work on CalPERS' part.

It would involve drawing in talented investment professionals, who would likely demand a salary similar to the financial rewards they receive at usual private equity funds.

Yet instead of trying to attract the cream of the crop of investment professionals, Phalippou said CalPERS could easily attract managers who are a “notch down” for a slightly lower salary.

The amount saved in fees would then balance out the potentially slightly lower returns from the investments.

The mooted move seems to be motivated by a desire for increased freedom. John Cole, an investment director at CalPERS, told the scheme's board on Monday that a number of private equity funds “have told us that we have become too unpredictable to do business with, and many larger general partners are cutting back the amounts that they are willing to allocate to us in their new funds”.

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