CalPERs private equity stakes under microscope

November 19, 2008

London-based private equity research firm Preqin has been busy crunching numbers from historical sales of pension fund giant CalPERS’ private equity assets.

The California pension fund sold $2.1 billion of private equity assets in late 2007 in the secondary market — which trades private equity stakes between the pension funds and endowment funds that want to exit or buy.

CalPERS updated information on its Website earlier this week giving fund data up to June 30. The tables are detailed, and forensic work is needed to work out the funds exited or bought into. Preqin said in a press release today that the net asset value of funds sold equates to 9 percent of CalPERs overall portfolio, and calculates the remaining value of its private equity portfolio at $21.5 billion.

Preqin said the majority of fund interests sold feature in the third and bottom quartiles of Preqin’s private equity benchmarks, however, the sale did include some top performing funds. 

The best performing fund interest sold was in Doughty Hanson Fund II, a buyout fund of vintage 1995 with a net IRR of 46.3 percent, Preqin said. It said the worst performing fund interest sold was in American River Ventures I, a 2001 vintage fund with net IRR of -27.7 percent. Preqin said the sales mainly included venture funds of vintages 2000 and 2001.

Calpers didn’t confirm Preqin’s calculations. The pension fund said it couldn’t specify how much more it gained from the sale in 2007, when the market was peaking, than if it had tried to sell it today.
But Leon Shahinian, Senior Investment Officer at CalPERS private equity program, said via an email from CalPERS spokesman: “In today’s market, we would have had hundreds of millions in losses.”

The pension fund said that its strategy dated back to late 2005, when its Alternative Investment Management program (AIM) presented a strategic plan to the CalPERS Board to lessen the administrative burden of having so many funds to oversee, and to optimize long-term private equity performance.

In 2006, it hired UBS Investment Bank to scrub its private equity portfolio and develop a list to sell. At that time, it had investments in several hundred funds.

The inital sale of the $2.1 billion assets — which were sold in the secondary market and not all in one go — was in the third quarter of 2007, when the Dow was ranging between 13,000 to 14,000.
CalPERS said there were 80 partnerships in this portfolio and 60 different general partnership relationships, diversified over various private equity sectors such as venture capital, distressed, buyouts, etc. Sales were completed in the fourth quarter of 2007.

The secondary market for private equity has heated up as equity markets have slid, meaning pension fund allocations to private equity have grown proportionally and now need to be rebalanced, as the FT points out in its Lex column today.

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