The California Public Employees’ Retirement System reported a 9.3% gain for its latest fiscal year, with returns driven largely by public equity investments and private debt.
The returns, which outpaced a 6.8% annual target, pushed total assets at the biggest US public pension fund to $502.9 billion for the fiscal year ended June 30, Calpers said Monday in a statement. That’s enough to cover 75% of its future obligations, better than 72% at the end of the previous year.
The preliminary five-year average return now stands at 6.6%, up from 6.1% the previous fiscal year.
Calpers said that public equity investments led the way among asset classes with an estimated 17.5% return, and that private debt came in second at 17%. Private market returns are reported with a one-quarter lag.
The largest US pension fund is increasing its exposure to private equity and private credit in a $34 billion bet that the riskier assets will fuel returns. The board made that decision earlier this year, boosting the target allocation for private equity to 17% of the portfolio, up from 13%. It’s also increasing private credit to 8% from 5%. It plans to pare its exposure to publicly traded stocks and bonds.
Investors have been beset by paltry returns as private equity firms struggled to offload portfolio companies in a lackluster dealmaking market and higher interest rates made it more expensive to finance those firms.
One metric that has become a proxy for satisfying fund backers is distributions, which are at their lowest level since the 2008 financial crisis. Distributions by some of the biggest private equity investment managers plunged by almost 50% last year compared with 2021.
A chorus of industry leaders has declared an end to the era of easy profit in the asset class. That means “fewer realizations and lower returns” are on the horizon for much of the industry, Apollo Global Management Inc. Co-President Scott Kleinman said last month at a conference in Berlin.
Calpers, however, is playing catch-up in the asset class after missing out on an earlier boom in private equity. The successive resignations of two chief investment officers, along with the downturn, have complicated the strategy.
The pension fund hired Stephen Gilmore from New Zealand’s sovereign wealth fund to start as its next chief investment officer this month. In his previous role, Gilmore had pushed for more investments in private assets.
Calpers manages money for more than 2 million retired police, firefighters and public services employees. If there’s a shortfall, municipalities across California could be forced to cut services to meet pension obligations.
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