CalSTRS Passes Its Private Equity Allocation Target

By David G. Barry

The California State Teachers Retirement System (CalSTRS) is above its private equity allocation target – but that has not kept it from making additional commitments.

According to information presented by consultant Meketa at CalSTRS’ Investment Committee meeting, the $301.5 billion system during the first six months of the year poured $5.1 billion into 38 investments. Included in that total were 14 co-investments, totaling $1.2 billion.

Tad Fergusson, a managing principal with Meketa, said the annual investing pace for the program is $8 billion. In 2021, CalSTRS invested a record $12.6 billion into private equity. Its prior high was $7.5 billion in 2019.

Its largest fund commitment was $350 million to Permira’s eighth fund. CalSTRS also invested $300 million each in funds being raised by AlpInvest, Thoma Bravo, Francisco Partners, Advent International and Apollo. The pension system also deployed capital to Invesco, Arsenal Capital Partners, NEA, Riverwood Capital Partners, Welsh, Carson, Anderson & Stowe, JMI Equity, Rubicon Technology Partners, Orbimed, HG and Oak HC/FT.

Its largest co-investment was for $150 million. Details on the companies that CalSTRS invested in was not disclosed.

As of March 31, the private equity portfolio’s net asset value (NAV) was $44.5 billion, or 14.5% of the total fund. CalSTRS set a long-term target for the asset class of 13% in 2019, a figure which it implemented earlier this year. The private equity program has grown nearly 29% since March 31, 2021.
In fact, the asset class accounted for just 9.5% of the total portfolio as of March 31, 2019.

According to data on CalSTRS’ website, its private equity portfolio as of July 31 was actually at $47.2 billion, representing 15.2%. Buyouts account for 75% of the system’s program, venture capital 10% and debt 5%.

John Haggerty, a Meketa managing director, indicated that CalSTRS might do less than its pacing in 2022, perhaps $7.5 billion.

The fact that CalSTRS is overallocated to private equity is, in a sense, an accomplishment as the system has worked hard over teh past few years to get it up to the 13% figure. The system also is a big believer in the asset class, given the returns it has generated and its potential to help the system meet its future goals.

For the year ended March 31, CalSTRS’ PE program generated a one-year return of 24.2%, significantly above its 7.5% custom benchmark but lagging the 25.1% of the Custom State Street Index. Fergusson said Meketa does expect returns to decrease as firms mark down their investments in the months to come.

Fund investments generated 23.8% over the past year while co-investments produced 26%. Co-investments accounts for 20% of the total investments.