Key Takeaways
- • CalPERS has restructured its private equity strategy to prioritize co-investment opportunities, targeting 40% of PE commitments to direct co-investments that carry no management fees or carry costs, generating an estimated $400 million in fee savings per $1 billion deployed.
- • The pension plan increased its overall private equity allocation to 17% from 13%, signaling a strategic pivot back into private markets after a period of reduced exposure and underperformance in co-investment activities.
- • CalPERS has shifted toward selective manager relationships and direct deal participation rather than maintaining a broad roster of general partners, mirroring strategies employed by top-performing superannuation funds like Rest Super, which delivered PE returns more than double peer averages.
- • The strategy addresses a long-term underperformance trend in CalPERS' co-investment program, correcting historical execution issues while enhancing portfolio diversification and reducing fee drag across the private equity portfolio.
- • Co-investments have emerged as a critical LP priority industry-wide, with institutional investors increasingly viewing co-investment rights as essential terms in GP partnerships as the favorable valuation environment of prior years moderates.
Summary
CalPERS, the U.S.'s largest public pension plan, has undertaken a significant restructuring of its private equity program centered on co-investment expansion and portfolio diversification. The pension plan has increased its overall PE allocation to 17% from 13%, marking a return to deeper private markets engagement after a period of reduced activity and underperformance in direct co-investment initiatives.
The strategic pivot focuses on two core objectives: deploying capital directly alongside general partners in co-investment vehicles while simultaneously reducing fee exposure. CalPERS projects that each $1 billion in co-investments generates approximately $400 million in cumulative savings on management fees and carry costs over the life of those investments. To operationalize this, the pension plan has set a target of allocating 40% of its private equity commitments to co-investment opportunities that carry no management fees or carried interest—a structural shift that directly addresses fee drag and aligns LP economics more favorably with long-term value creation.
This approach mirrors strategies deployed by leading institutional investors globally. Rest Super, one of Australia's largest superannuation funds with A$112 billion in assets, has demonstrated that a concentrated bet on fewer, higher-quality general partner relationships delivers superior risk-adjusted returns. Rest Super's selective manager and deal selection methodology—rather than maintaining a broad roster—produced private equity returns exceeding peer averages by more than 100% in its most recent fiscal year. CalPERS' move toward direct deal participation and selective GP partnerships reflects similar conviction that concentrated engagement with top-tier managers outperforms broad-based commitments.
The restructuring also responds to a long-standing performance challenge. CalPERS had historically underperformed in co-investment execution, a trend that required systematic correction through portfolio rebalancing and enhanced operational discipline. By shifting portfolio composition toward co-investments, the pension plan addresses both fee economics and the execution capabilities required for direct private equity deployment.
Context from other major institutional investors underscores the broader industry shift toward co-investment prioritization. General partners increasingly expect co-investment rights to be negotiated as core terms in LP-GP partnerships, as allocators seek cost-effective exposure and enhanced alignment. However, market conditions are moderating: OMERS has warned that the exceptionally favorable environment of high valuation multiples and low interest rates that sustained over a decade of superior PE returns is fading, suggesting that future performance will depend on deal selection discipline and operational execution rather than market tailwinds alone.
The strategic pivot focuses on two core objectives: deploying capital directly alongside general partners in co-investment vehicles while simultaneously reducing fee exposure. CalPERS projects that each $1 billion in co-investments generates approximately $400 million in cumulative savings on management fees and carry costs over the life of those investments. To operationalize this, the pension plan has set a target of allocating 40% of its private equity commitments to co-investment opportunities that carry no management fees or carried interest—a structural shift that directly addresses fee drag and aligns LP economics more favorably with long-term value creation.
This approach mirrors strategies deployed by leading institutional investors globally. Rest Super, one of Australia's largest superannuation funds with A$112 billion in assets, has demonstrated that a concentrated bet on fewer, higher-quality general partner relationships delivers superior risk-adjusted returns. Rest Super's selective manager and deal selection methodology—rather than maintaining a broad roster—produced private equity returns exceeding peer averages by more than 100% in its most recent fiscal year. CalPERS' move toward direct deal participation and selective GP partnerships reflects similar conviction that concentrated engagement with top-tier managers outperforms broad-based commitments.
The restructuring also responds to a long-standing performance challenge. CalPERS had historically underperformed in co-investment execution, a trend that required systematic correction through portfolio rebalancing and enhanced operational discipline. By shifting portfolio composition toward co-investments, the pension plan addresses both fee economics and the execution capabilities required for direct private equity deployment.
Context from other major institutional investors underscores the broader industry shift toward co-investment prioritization. General partners increasingly expect co-investment rights to be negotiated as core terms in LP-GP partnerships, as allocators seek cost-effective exposure and enhanced alignment. However, market conditions are moderating: OMERS has warned that the exceptionally favorable environment of high valuation multiples and low interest rates that sustained over a decade of superior PE returns is fading, suggesting that future performance will depend on deal selection discipline and operational execution rather than market tailwinds alone.
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