CalPERS mulls increasing alternatives allocation

The $182bn pension, struggling with the denominator effect, will vote next week whether to raise the upper limit of its target allocation to private equity and real estate. The fund also has committed $150m to Carlyle’s dedicated financial services fund.

The $182 billion California Public Employees’ Retirement System is considering temporarily increasing its target allocation range to private equity and real estate in an attempt to combat an increasingly overweighted alternatives portfolio.

In documents released today ahead of next week’s investment committee meeting, CalPERS staff recommended that the pension increase the upper limit of its target allocation to alternative investment managers, including private equity and hedge funds, from 13 percent to 18 percent.

As of 31 October, CalPERS’ actual allocation to its alternatives programme stood at 13.8 percent, well above its policy target of 9.5 percent.

CalPERS staff also recommended bumping the upper limit of its target real estate allocation from 13 percent to 15 percent.

The changes only would be valid until a comprehensive asset allocation review is conducted in the first half of 2009, according to investment committee documents.

The new measures, which also include an expansion of the target policy range for global equities from 5 percent to 15 percent, are intended to remedy the so-called denominator effect, whereby an institutional investor’s sinking assets under management, caused in this case by CalPERS plunging public equities programme, causes its actual allocation to illiquid asset classes such as private equity and real estate to become overweighted.

CalPERS investment advisors Wilshire Consulting and Pension Consulting Alliance have both endorsed the new measures after reviewing alternative strategies. In a letter to CalPERS investment committee members, Wilshire said “no other option, including buying stock options to hedge further market declines, selling fixed income at current prices, or reinvesting the pension’s cash reserves in equity futures, appeared to be a better use of CalPERS capital.”

The denominator effect, which has roiled the private equity fundraising market, has caused other major limited partners to adopt similar measures. Just last month, the California State Teachers’ Retirement System voted to temporarily increase the upper limits of its target allocations to private equity and real estate.

Other investors who have adopted similar measures include the Montana State Board of Investment and the Florida State Board of Administration.

In related news, CalPERS disclosed a $150 million commitment to Carlyle’s first financial services fund.

Carlyle Global Financial Services Partners will target distressed seller and divisional carve-outs in the financial services sector, including banking, insurance, asset management, specialty finance, capital markets and financial technology companies. The fund already has closed on more than $600 million in commitments and is targeting a final size in excess of $1 billion, according to investment committee documents.