By David G. Barry
The California State Teachers’ Retirement System (CalSTRS) could see assets under management almost double over the next 10 years – but doing so without sizable cost increases will involve additional staffing and consultant resources and cooperative private equity managers.
That’s the message that Chief Investment Officer Christopher Ailman spelled out to the CalSTRS Investment Committee as he presented the fiscal year 2022-23 investment office business plans and the 10-year financial plan.
According to projections displayed by Ailman, CalSTRS could grow to have as much as $550 billion in assets under management by fiscal year 2031-32. The system ended the 2020-2021 fiscal year with $308 billion in assets. It has not yet reported its 2021-2022 results, but Ailman at that same meeting indicated that the plan would be above $300 billion but would have a 1% to 2% loss. CalSTRS is striving to earn on average 7% over the next 20 years.
Stressing that it is an “uncertain future,” Ailman said that the “complexity” of the investments and structured are expected to continue to expand and that future work environment and structures will also change. Costs, he said, will also rise unless CalSTRS further implements its so-called Collaborative Model.
The system’s Collaborative Model 1.0 is already saving close to $300 million per year in fees. It was established to reduce costs, control risks and ideally boost returns by doing such things as managing more assets in-house, co-investing and, at least in real estate, acquiring interests in money managers. CalSTRS last year said it saved a total of $781 million for the four years ended 2020, including $309 million in costs savings in 2020.
Collaborative Model 2.0 and eventually 3.0 have the capacity, said Ailman, to more than double the annual savings. He projects that by spending an additional $15 million annually on personnel and travel costs and an additional $25 million on consultants and advisors, the amount of money paid out to general partners could drop by $750 million.
“You hand me 40 bucks and I’ll give you 750 bucks,” said Ailman. “Who wants to do that trade? But it’s hard.”
He called the projected cost savings an “honest estimate.” But he said for the board to implement it will have to make some hard decisions to carry out the strategy, such as increasing compensation to attract and retain skills like investment banking.
Ailman said that CalSTRS would seek to generate the reduction in fees by doing such things as expanding the ownership of real estate operating companies, develop collaborative structures in the private sustainable investment & stewardship strategies portfolio, add more collaborative model structures in infrastructure, expand some of the internal management of assets and grow the private equity co-investment portfolio.
In fact, Ailman said the potential aim would be for 50% of CalSTRS’ private equity program to be dedicated to co-investing.
CalSTRS, however, will need to overcome a series of challenges to generate the projected costs savings from the collaborative models. These include continuing to attract and retain staff with investment banking and direct investment skills, having the proper technology for reporting and accounting, and handling control, more oversight and larger risks, The biggest challenge, said Ailman, is getting access to co-investment opportunities.
The system, he said, will be battling to get into deals versus others who are active or are looking to get active as co-investors such as CPP Investments, the California Public Employees’ Retirement System, GIC, University of Texas Investment Management Co., and Abu Dhabi Investment Authority.
“We have to be a good partner,” he said.