Key Takeaways
- • CalPERS is increasing total private market allocations from 33% to 40% of the $519.9 billion pension fund, with private equity rising from 13% to 17% target allocation and private debt increasing from 5% to 8%.
- • New CIO Stephen Gilmore, only two months into the role as of September 2024, is addressing historical underperformance in co-investments while implementing a talent and culture overhaul within the investment office.
- • Private equity has delivered 12.3% annualized returns over 20 years, outperforming all other asset classes, while private debt generated 13.3% one-year returns as of end of 2023, justifying the strategic shift toward alternatives.
- • CalPERS is gradually closing a $189.9 billion allocation gap between its current 30% private markets exposure (as of June 30, 2024) and its new 40% target, requiring disciplined capital deployment across co-investments and diverse managers.
- • The fund is correcting a 30-year trend of co-investment underperformance relative to fund investments and adopting a Total Portfolio Management framework with a reference portfolio of 75% equity and 25% bonds to strengthen risk-adjusted returns.
Summary
CalPERS' newly appointed Chief Investment Officer Stephen Gilmore is leading a significant strategic reorientation of the $519.9 billion pension fund toward alternative investments while simultaneously addressing longstanding performance challenges. In his first two months, Gilmore has unveiled plans to increase total private market allocations from 33% to 40% of plan assets—a proposal approved by the CalPERS Board of Administration in March 2024 and now being implemented with gradual capital deployment. Private equity will increase from a 13% target to 17%, while private debt allocations will rise from 5% to 8%, representing one of the largest structural shifts in the fund's portfolio composition.
The strategic rationale is grounded in compelling recent performance metrics. CalPERS' analysis demonstrates that private equity has delivered 12.3% annualized returns over a 20-year period, making it the top-performing asset class in the fund. Over five-year and ten-year horizons, private equity similarly outpaced all other asset classes as of end of 2023. Private debt, established as a separate asset class in 2022, generated 13.3% one-year returns as of the end of 2023. These returns have prompted the board to authorize measured increases while market conditions remain favorable for capital deployment.
A critical element of Gilmore's mandate involves correcting historical underperformance in co-investments. CalPERS officials have identified that over 30 years of investing, co-investments underperformed fund investments in most periods, even on a net-of-fees basis. This structural weakness has been a drag on returns and represents a specific performance gap that the new CIO intends to systematically address through operational and strategic refinements, including a shift away from large buyout strategies toward more diversified manager participation.
As of June 30, 2024, CalPERS' actual private markets exposure stood at approximately 30%, creating a $189.9 billion allocation gap to the new 40% target. Gilmore has committed to gradually increasing exposure to close this gap through disciplined capital deployment rather than rapid reallocation. The fund is simultaneously implementing a Total Portfolio Management framework, establishing a reference portfolio benchmark of 75% equity and 25% bonds—representing higher risk tolerance than the fund's traditional positioning. This reflects management's conviction that achieving sustainable returns for 2.4 million members requires shifting asset allocation toward higher-returning alternatives while maintaining appropriate risk governance through engagement with portfolio companies and adherence to newly adopted labor principles.
The strategic rationale is grounded in compelling recent performance metrics. CalPERS' analysis demonstrates that private equity has delivered 12.3% annualized returns over a 20-year period, making it the top-performing asset class in the fund. Over five-year and ten-year horizons, private equity similarly outpaced all other asset classes as of end of 2023. Private debt, established as a separate asset class in 2022, generated 13.3% one-year returns as of the end of 2023. These returns have prompted the board to authorize measured increases while market conditions remain favorable for capital deployment.
A critical element of Gilmore's mandate involves correcting historical underperformance in co-investments. CalPERS officials have identified that over 30 years of investing, co-investments underperformed fund investments in most periods, even on a net-of-fees basis. This structural weakness has been a drag on returns and represents a specific performance gap that the new CIO intends to systematically address through operational and strategic refinements, including a shift away from large buyout strategies toward more diversified manager participation.
As of June 30, 2024, CalPERS' actual private markets exposure stood at approximately 30%, creating a $189.9 billion allocation gap to the new 40% target. Gilmore has committed to gradually increasing exposure to close this gap through disciplined capital deployment rather than rapid reallocation. The fund is simultaneously implementing a Total Portfolio Management framework, establishing a reference portfolio benchmark of 75% equity and 25% bonds—representing higher risk tolerance than the fund's traditional positioning. This reflects management's conviction that achieving sustainable returns for 2.4 million members requires shifting asset allocation toward higher-returning alternatives while maintaining appropriate risk governance through engagement with portfolio companies and adherence to newly adopted labor principles.
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