CalPERS Could Become a Big Secondary Buyer

By David G. Barry


Earlier this year, the California Public Employees’ Retirement System (CalPERS) made what is considered the largest-ever secondary sale, selling private equity fund stakes worth $6 billion.

But going forward, CalPERS may look to be a more active player in pursuing secondary purchases, Chief Investment Officer Nicole Musicco told the CalPERS Investment Committee at its September meeting.
The $440 billion fund, said Musicco, may be able to take advantage of other institutional investors being above their illiquidity levels to “backfill old vintages” by buying stakes on the secondary market. One benefit of such transactions is that CalPERS would “get to do the work,” she said.

CalPERS, said Musicco, is currently in a prime position as many institutional investors are overallocated to private equity and private markets in general.

“We have more room to do things in private equity than some of our peers because we’ve been late to the game,” Musicco told the committee.

In a report to the committee, Musicco said the system is looking to invest a record $17 billion into private equity in 2022. It will seek to commit $15 billion or more annually to stay at its 13% target allocation. The CalPERS’ board approved increasing its target allocation to private equity to 13% from 8% in November.

As of June 30, CalPERS’ actual allocation to private equity was $52.8 billion, or 12% of its fund.

CalPERS is, in a sense, trying to recover from a period between 2009 and 2018 when it averaged $2.7 billion annually in the asset class. In a presentation to the investment committee, the period was labeled by CalPERS as one when it had “persistent under-exposure to private equity relative to target allocation.” In fact, it estimates that this so-called “lost decade” of investing in private equity cost it more than $11 billion.

The CalPERS private equity team – led by Managing Director Greg Ruiz – has “turned around” the program over the past few years, said Musicco. She said the team has done a “very good job at choosing partners who are real value creators.”

This is important, she said, because she foresees private equity entering an era that’s “old school,” where the best firms will be those with the capability of generating value from “old, plain, boring-type companies with cash flow.”

CalPERS, she said, will look to work with these firms as well as potentially other institutional investors as a co-investor. The system, she said, is developing a reputation as a “good partner,” on such deals – including being able to quickly give an answer and being a “true thought leader on ESG integration.”
Equally important, it has capacity to do such deals.

“We’re one of the few plans on the globe that can frankly show up with large equity checks,” Musicco said.

The potential in co-investments – especially as deals get larger – is a key reason she is seeking board approval to expand the size of deals that she, Deputy CIO Dan Bienvenue and the managing investment directors for the various private asset segments can OK without board approval.

The board heard the proposal and seemed generally on board, although a bit concerned about the idea of doing more infrastructure deals abroad given the current economic state globally. The board will consider formally in November.

Musicco said if CalPERS can show it’s “more agile” and has “more flexibility” in doing such deals, the system is suddenly in position “to become a first call.”

Co-investments are the key, said Musicco, to “moving the needle” for the system.