CalPERS’ investment committee is scheduled to decide at its Dec. 16 meeting whether to adopt new investment policies for its private equity and real assets programs that continue to redefine the roles of the staff and the investment committee.
The $388.9 billion California Public Employees’ Retirement System, Sacramento, private equity and real asset investment policy proposals eliminate the requirement that staff members report “concerns, problems, material changes and all violations of the policy to the investment committee” in favor of a blanket requirement for all asset classes in the new total pension fund investment policy. That mandate requires reporting of only material changes and violations of investment policies and exempts temporary mismatches from the adoption of a new investment program.
The new private equity policy also clarifies the expectation that the staff will be responsible for evaluating a prospective general partner’s investment expertise for its proposed investment strategy. The private equity policy proposal redefines customized investment accounts more loosely as an investment structure in which CalPERS partners with a firm with “appropriate investment expertise for the proposed investment strategy.” The current definition requires the customized investment account manager to have an “investment expertise in an industry, geographic region or investment style and has demonstrated the ability to provide top-quartile returns.”
The private equity investment policy proposal continues the increased investment discretion provided to the CIO of up to $1 billion per fund commitment and $1.7 billion per secondary commitment, and to the managing investment director of $500 million per fund commitment and $900 million per secondary commitment when CalPERS last modified the private equity investment policy in August 2018.
The real assets investment policy proposal reduces the total commitments the managing investment director may make without board approval per fiscal year to $15 billion across real assets, from $10 billion for real estate and $3 billion each for infrastructure and forestland. The discretion for total dispositions, or asset sales, to the managing investment director is likewise being cut to $15 billion across real assets per fiscal year, from $10 billion for real estate and $3 billion each for infrastructure and forestland. The per fund commitment maximum to the CIO of $6 billion for real estate and $2 billion each for infrastructure and forestland, and to the managing investment director of $3 billion for real estate and $1 billion each for infrastructure and forestland would be maintained.
Separately, CalPERS paid a total of $382 million in management fees and other costs, and $537 million in carried interest to private equity managers for the year ended June 30, according to an alternative investment fee report required by state law. CalPERS has made $57.3 billion in commitments to private equity funds since inception of the investments. During the same period, CalPERS received a total cash profit from its private equity portfolio of $3.1 billion.
During the year ended June 30, CalPERS paid $258 million in management fees and costs to real assets managers, and $248 million in carried interest to real asset general partners. CalPERS received total cash profits in the year ended June 30 of $1.3 billion. Total real asset commitments since inception are $68.1 billion.
In other news, some 20% of CalPERS public equity and fixed-income assets are invested in sectors most exposed to climate risk and opportunities, said the pension fund’s first climate-related financial risk report, which was mandated by another state law. Some 8 percentage points of the exposure is in energy; 6 percentage points in building and materials; 3 percentage points in transportation; and 3 percentage points in agriculture, food and forestry.
The report noted that CalPERS has made significant investments in climate solutions in its private asset portfolios, including 50% of its power and energy infrastructure investments in renewable energy power plants and carbon-agnostic transmission assets.
During the 2019 proxy season, CalPERS voted on 81 shareholder proposals related to environmental topics, the report said.
“Typically, CalPERS supports proposals that ask for improved environmental risk reporting, unless it is believed the company already adequately discloses these risks. In general, CalPERS does not support environmental proposals intended to substitute for management’s operational judgments,” the report said.
In 2019, CalPERS supported 44 of 81 proposals (54%) and 33 of 36 proposals (92%) that asked companies to report on risks linked to sustainability, the environment, or climate change.
CalPERS voted against all 10 proposals to phase out nuclear power and against all seven proposals to form an environmental/social board committee. CalPERS voted for the majority of proposals seeking adoption of comprehensive recycling strategies, bioengineering/nanotechnology safety, and environmental or sustainability reports.