After strong investment gains, CalPERS expects to lean into private equity

After California’s largest pension system announced its rosy returns for the last 12 months, Chief Investment Officer Stephen Gilmore said the pension fund was “journeying towards where we would like it to be.”

The returns represented an upswing from the previous year. The 11.6% preliminary return outperformed the benchmark over the last year, which was not the case for the previous fiscal year.

Additionally, the long-term returns indicated that the California Public Employees Retirement System’s investments are helping to increase the pension system’s funding level. On Monday, CalPERS reported it has 79% of the money to cover its financial obligations, up from 75% last year.

Gilmore told reporters he hoped that CalPERS’ other private market teams, such as those handling private debt and real estate and infrastructure investments, embrace strategies that private equity has used to secure better returns.

“The direction you’re seeing is what you should continue to see,” he said.

One of these strategies included tapping into the potential high returns of emerging managers, people who typically manage fewer, smaller funds and bring innovation and unique expertise to investing opportunities.

CalPERS plans to continue leveraging its advantage as a large, long-term source of capital to prioritize co-investments, Gilmore said, which allows the pension system to invest alongside a fund manager, resulting in reduced transaction fees.

Based on those strategies, the chief investment officer said he expected CalPERS’ investments in private equity to increase.

Private equity assets, which comprise roughly one sixth of the $557 billion fund’s total investments, have come under scrutiny from one stakeholder group, the Retired Public Employees Association of California, which is attempting to finance an independent investigation of the pension fund.

The group’s president, Margaret Brown, said she was skeptical of CalPERS’ reported returns due to “opaque and unverified private equity valuations.”

“I have grave concerns that CalPERS plans to double down on private equity,” Brown said in a statement. “It’s far too much risk for a public pension fund that millions of retirees depend on.”

In response to the group’s concern, CalPERS CEO Marcie Frost said Monday CalPERS has conviction in private equity as an asset class that will outperform public markets in the long term.

“Why shouldn’t our members have access to those outsized returns?” Frost said.