California Public Employees' Retirement System (CalPERS), one of the largest limited partners of private equity industry and the largest public pension fund in the US, has cut down its holdings of private equity funds, a process it started three years ago. It has so far sold 26% of its private equity interests, according to data provided by Prequin , a London based research house which tracks limited partnersprivate equity investments. In fact, CalPERS is considered a gainer of sorts since it started selling its holdings way back. Ever since the markets have slid.
CalPERS has sold interests in 74 funds, leaving its total portfolio at 288 funds currently. Preqin said that 99 funds have been removed from CalPERS’ private equity portfolio, while a 25 of these funds were already or nearly liquidated.
Although the number of funds sold look larger, in terms of value they are much less pronounced. The net asset value of funds sold is $1.9 billion, which equates to 9% of its overall portfolio, The remaining value of its private equity portfolio is $21.5 billion, Preqin said.
This indicates that CalPERS is seeking to streamline its portfolio and focus on a smaller number of larger fund commitments, Preqin said.
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 that it has gained from the sale in 2007, when the market was peaking, than if it had tried to sell it today.
Impact on Private equity
These are indeed not good signals for private equity funds who mostly have allocations from such pension or endowment funds. The secondary market for private equity has heated up as equity markets have slid.
Private-equity firms - already under pressure from a drop in the financing needed to do deals – will now face resistance from another key funding source, pension funds.
Such observations really put a question mark on the long-term nature of private equity capital which is often overstated. Private equity funds have commitments from investors to call capital as needed to make investments. Most funds hold just minimal cash or other assets that could be considered actual long-term capital. But in times of an economic crisis, the commitments can taper off.