CalPERS’ historic $59bn shift to alternatives includes new private debt asset class

The $495 billion California Public Employees’ Retirement System approved a new asset mix that will implement a key $59 billion additional capital allotment to private equity, real assets and the development of a new private debt asset class.  

Unsurprisingly, the assets will largely come from the global equities portfolio that will now total 42% of assets down from a previous target allocation of 50% of the overall investment portfolio. The nearly $5 billion liquidity portfolio has also been eliminated.

The new asset allocation is geared toward maintaining the same long-term return target of 6.8% annualized. The board also approved adding 5% leverage in order to increase diversification.

“The actions we’ve taken today provide the framework for the long-term success of the CalPERS fund,” said Theresa Taylor, chair of the Investment Committee. “The portfolio we’ve selected incorporates a diverse mix of assets to help us achieve our investment return target of 6.8%. And by adding 5% leverage over time, we’ll better diversify the fund to protect against the impact of a serious drawdown during economic downturns.”

The allocation changes are notable in that they shift the balance of power increasingly into the private capital arena with a new target allocation of 42% equities, 33% alternative investment strategies and 30% fixed income.

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Interestingly, the move to establish a formal private debt portfolio follows a failed legislative attempt in 2020 by the pension fund to limit transparency on private debt investments.  

The new private debt portfolio would total 5% or roughly $25 billion in capital.

It is not as though the largest pension fund system in the U.S. is a stranger to private debt strategies. CalPERS established the opportunistic strategies division in 2016 that includes private debt investments, which include bank loans, CLOs, market dislocation strategies, middle market direct lending, specialty lending, liquidity financing, real estate financing and structured products.

The opportunistic strategies portfolio was already plotting a shift from 3% of assets to 5% as we reported in 2020. But following a full asset liability study, the new asset mix has provided definitive clarity on the issue.

Under the new mix, the private equity portfolio would see a bump up of roughly $25 billion to total 13% of assets which is up from 8%.

Then within real assets the portfolio will grow to 15% of assets from 13% of assets representing a jump of $10 billion.

The new asset mix is effective as of July 2022.

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