Key Takeaways
- • CalPERS reversed a 30-year trend of co-investment underperformance within the past three years, with co-investments now outperforming funds on a gross basis, according to PE Chief Anton Orlich.
- • The pension fund's strategic shift away from large buyouts toward venture and growth equity strategies has coincided with improved co-investment returns, with growth equity increasing to 31% of the PE portfolio in fiscal year 2024 from 9% previously.
- • Co-investments historically underperformed funds "in most periods, even on a net basis" over CalPERS' 30-year investing history, representing a significant drag on returns that the system has now begun to correct through its 2022 overhaul.
- • CalPERS set a target of achieving a 40% co-investment ratio for 2023 and 2024 vintages, with projections indicating each $1 billion in co-investments generates incremental value relative to the fund-only approach.
Summary
CalPERS, the nation's largest public pension with $613 billion in assets, has successfully reversed a multi-decade underperformance trend in its private equity co-investment strategy. According to Anton Orlich, the system's PE chief, the fund faced a structural challenge over its 30-year history: co-investments consistently underperformed pooled fund returns, even after accounting for net-of-fees performance. This persistent drag on returns has now shifted course over the past three years, with co-investments beginning to outperform funds on a gross basis.
The turnaround is directly tied to CalPERS' strategic portfolio repositioning launched in the fourth quarter of 2022. Rather than maintaining a balanced approach across large buyout transactions, the pension fund rebalanced its private equity allocation toward venture capital and growth equity strategies. Growth equity exposure expanded dramatically to 31% of the PE portfolio in the fiscal year ended June 2024, up from just 9% previously. This strategic pivot aligns co-investment activity with asset classes where CalPERS has demonstrated competitive advantages and where deal sourcing opportunities better match the fund's selective co-investment mandate.
The system's refined approach emphasizes co-investing on a "selective basis" rather than pursuing co-investment opportunities across all vintages and strategies indiscriminately. CalPERS established a target of achieving a 40% co-investment ratio for 2023 and 2024 vintage years, with internal projections suggesting each $1 billion deployed in co-investments generates measurable incremental value. The structural improvements reflect both better deal selection disciplines and improved alignment between portfolio construction decisions and CalPERS' ability to add value through direct participation in growth-stage and venture transactions.
The preliminary results demonstrate tangible performance gains. CalPERS' private equity portfolio returned 17% net in the period following the 2022 overhaul, extending gains that reflect the combined impact of strategy reallocation and improved co-investment execution. This performance recovery positions CalPERS' approach as a potential model for large institutional investors grappling with similar co-investment underperformance dynamics, suggesting that strategic reorientation toward higher-conviction asset classes and disciplined deal selection can materially improve returns in what historically has been a problematic allocation area.
The turnaround is directly tied to CalPERS' strategic portfolio repositioning launched in the fourth quarter of 2022. Rather than maintaining a balanced approach across large buyout transactions, the pension fund rebalanced its private equity allocation toward venture capital and growth equity strategies. Growth equity exposure expanded dramatically to 31% of the PE portfolio in the fiscal year ended June 2024, up from just 9% previously. This strategic pivot aligns co-investment activity with asset classes where CalPERS has demonstrated competitive advantages and where deal sourcing opportunities better match the fund's selective co-investment mandate.
The system's refined approach emphasizes co-investing on a "selective basis" rather than pursuing co-investment opportunities across all vintages and strategies indiscriminately. CalPERS established a target of achieving a 40% co-investment ratio for 2023 and 2024 vintage years, with internal projections suggesting each $1 billion deployed in co-investments generates measurable incremental value. The structural improvements reflect both better deal selection disciplines and improved alignment between portfolio construction decisions and CalPERS' ability to add value through direct participation in growth-stage and venture transactions.
The preliminary results demonstrate tangible performance gains. CalPERS' private equity portfolio returned 17% net in the period following the 2022 overhaul, extending gains that reflect the combined impact of strategy reallocation and improved co-investment execution. This performance recovery positions CalPERS' approach as a potential model for large institutional investors grappling with similar co-investment underperformance dynamics, suggesting that strategic reorientation toward higher-conviction asset classes and disciplined deal selection can materially improve returns in what historically has been a problematic allocation area.
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