private equity (pe) annual program review - calpers · pdf file13.11.2017 · 1 ....
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Private Equity (PE)
Annual Program Review
Sarah Corr
Interim Managing Investment Director
Mahboob Hossain
Investment Director
November 13, 2017
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Private Equity Annual Program Review
Program Performance Review
1-YR 3-YR 5-YR 10-YR 20-YR
As of June 30, 2017* Net Return Net Return Net Return Net Return Net Return
Private Equity ($25.9b) 13.9% 8.1% 11.5% 9.3% 11.3%
PE Policy Benchmark 20.3% 9.9% 13.7% 13.0% 9.6%
Excess Return (6.4)% (1.8)% (2.2)% (3.7)% 1.7%
CalPERS GE Policy
Benchmark(as of 3/31/17 to match PE one quarter lag)
16.2% 5.5% 9.2% 4.9% 6.8%
Excess Return (2.3)% 2.6% 2.3% 4.4% 4.4%
*Source: State Street
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Private Equity Annual Program Review
Program Characteristics
*Based on NAV as of June 30, 2017; $s in billions; Includes currency and distributed securities in the amount of $93mm
Source: State Street
Strategy Net Asset
Value* Current* Target 5-Year Net
Return
Buyouts $15.3 59% 60% 12.2%
Growth/Expansion $4.4 17% 15% 12.8%
Credit Related $3.0 12% 15% 8.1%
Opportunistic $2.1 8% 10% 13.4%
Venture Capital $1.0 4% <1% 4.7%
Total $25.9 100% 100% 11.5%
$25.9b Current
Net Asset Value*
59% 17%
12%
8% 4%
• All strategies are within policy range
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Private Equity Annual Program Review
2016-17 Activities
2017-18 Objectives
• Committed $3.3b to new opportunities
• Private Equity Accounting and Reporting Solution (PEARS)
Rolled out two releases - final release expected by October 2017
• Transparency – Institutional Limited Partners Association (ILPA) Template
77% of Strategic funds provided template as of Q1 2017
• Costs – external management fees of 91 bps of AUM and profit sharing paid was
$455m relative to CalPERS realized gain of $3.5b
• Allocate up to $4b
• Collaborate with Global Equity on the implementation of the Growth asset segment
• Refine business model
• Implement reporting requirements of AB 2833
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Private Equity Annual Program Review
Appendix
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Private Equity Annual Program Review
Pages 1 2 3 4 5 6 7 8 9 102-4
2
3
4
Review Outline 6
7
8
9
10
Program Characteristics 11
12
13
14-16
17-19
Portfolio Key Risks 20
21
22
23
24
Sustainable Investment Practices 25-26
27
Program Role
Program Investment Philosophy
III. Business Review
Functional Organizational Chart
Staffing Overview
Conclusion
Program Performance Review
Market Environment
Investment Beliefs Map
Section
Program Expenses
Executive Summary
Program Performance Review
Program Characteristics
Accomplishments & Objectives
Policy Benchmark
Investment Process
II. Investment Review
I. Program Overiew
Review Outline
Liabilities 1
Stakeholders 3
Long-Term Horizon 2
Accountability 5
Three Forms of Capital 4
Strategic Allocation 6
Risk Reward 7
Costs Matter 8
Multi-faceted Risk 9
10 Resources/Process
↑
↑ ↑
↑
↑
↑
↑
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Item 6a - Attachment 1, Page 7 of 27
Private Equity Annual Program Review
I. Program Overview
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Private Equity Annual Program Review
Private Equity: Program Role
• Primary Role – Private equity allocations are a means of enhancing equity returns
through an active, value-added approach. The major driver for returns is
appreciation, aided by leverage, with negligible cash yield.
− 2017 Asset Liability Management (ALM)
• Driver of total performance
– Price appreciation
• Risks
– Growth risks
– Illiquid
– Leverage
– Unfunded commitments
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Private Equity Annual Program Review
Program Investment Philosophy
• Long-term investment horizon
• Manager selection and alignment of interest are important
to PE’s success
• Over-diversification negatively impacts performance
• Costs matter
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Private Equity Annual Program Review
Policy Benchmark
Current
Effective July 1, 2018
• 67% FTSE U.S. Total Market + 33% FTSE All World ex U.S. + 300 bps − Lagged one quarter
− Attempted to reflect actual geographic exposures
• FTSE All World, All Capitalization (Global Equity) + 150 bps
− 2013 CMA expectations had a 158 bps spread between GE and PE
(arithmetic)
(geometric)
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Private Equity Annual Program Review
Program Characteristics
Investment Type Net Asset
Value (NAV)* % of NAV
Funds $17.1 66%
Fund-of-Funds $3.1 12%
Co-Investments/
Direct Investments $2.1 8%
Separate Accounts $3.5 14%
TOTAL $25.9
* Based on NAV as of June 30, 2017; $s in billions; Includes currency and distributed securities in the amount of $93mm; Source: State Street
**Based on Market Value as of December 31, 2016; Source: PEARS
By
Geo
grap
hy**
B
y In
dust
ry**
Energy 10%
Industrials 11%
Consumer Related
22%
Health Care 12%
Financials 17%
Information Technology
16%
Other 12%
Emerging Markets
12%
Europe 21%
United States 63%
Other 4%
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Private Equity Annual Program Review
Investment Process
Investment Review
Committee (IRC) • Purpose: Consistent review of
investments and portfolio
• Timing: Weekly
• Participants: − 1 Managing Investment Director
(MID); 2 Investment Directors (IDs)
(PE)
− 1 MID (Real Assets)
− 1 ID (Global Fixed Income)
− 1 Investment Manager (IM) (Trust
Level Portfolio Management)
− 1 IM (ICOR)
− Board Consultant • Portfolio
diversification
• Purchase price
multiple
• Market Overview
• Capital Allocation
and pacing
• Benchmark
• Risk analysis
• Performance
attribution
Risk, Research, Analytics &
Performance:
• Communication
with other LPs
• Review of quarterly
financials
Portfolio Construction
• Pacing Analysis
• Forward Calendar
• House View
• Sourcing
• Screening
• Due Diligence
• Portfolio Rebalancing
IRC
Annual capital allocation and pacing recommendation, Market Overview, and House View
Due diligence and approval of new investments
Monitor existing portfolio and develop portfolio insight
Investment
Underwriting:
• Sourcing
• Due Diligence
• Investment
Recommendations
• Legal Negotiations
Investment
Management:
• Quarterly Monitoring Report
• Company level performance
• Capital Calls
• Manager, market & co.
level updates
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Item 6a - Attachment 1, Page 13 of 27
Private Equity Annual Program Review
II. Investment Review
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Private Equity Annual Program Review
Source: Preqin
*Excludes Real Estate and Infrastructure
Market Environment - Fundraising
• Strong fundraising market and record levels of dry powder ($906b*) is creating a competitive
environment for purchasing assets
• Fundraising for Buyout strategy accounted for 55% of overall fundraising in 1H 2017
$280
$425
$506 $515
$268 $228
$298 $332
$415 $446
$468 $501
$280
$0
$100
$200
$300
$400
$500
$600
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 1H 2017
(US $ in Billions) Fundraising by Geography
US Europe Rest of World
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Private Equity Annual Program Review
Source: Preqin
Market Environment – Valuations
• High valuations continue to make it challenging to find attractively valued assets
6.7x
6.0x 6.6x
7.1x 7.3x
8.4x 8.4x
9.7x 9.1x
7.7x
8.5x 8.8x 8.7x 8.8x
9.7x 10.3x 10.0x 10.3x
-1.0x
1.0x
3.0x
5.0x
7.0x
9.0x
11.0x
EV/EBITDA All U.S. LBO
Debt/EBITDA Equity/EBITDA
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Private Equity Annual Program Review
Source: Preqin
Market Environment – Exits & Liquidity
• Exit markets were robust over the last few years but slowed down in 2016 and 1H 2017 amidst a
decrease in M&A and IPO activity
• 12% decrease in exits between the 1H 2016 and 1H 2017
• Q2 2017 had the lowest number of quarterly exits since 2010
$187 $202
$312
$133
$98
$271
$352 $329
$345
$483
$438
$301
$105
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 1H 2017
(US $ in Billions) PE Buyout Exits
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Private Equity Annual Program Review
Commitments and Unfunded
As of June 30, 2017
Source: PEARS
$8.4
$11.2
$9.3
$0.9 $0.7 $1.9
$2.4 $3.8 $4.1
$3.1 $2.9 $2.6
$13.7
$20.3
$22.0
$19.9
$15.5
$12.7
$10.2 $11.0
$13.1 $14.2 $14.4 $14.3
$0.0
$5.0
$10.0
$15.0
$20.0
$25.0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Bill
ion
s
Commitment by Vintage Year Cumulative Unfunded
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Private Equity Annual Program Review
Cash Flow by Fiscal Year
As of June 30, 2017
Source: PEARS Cash Flow Report
• PE provided net cash flow of $28 billion since FY 2010/2011
-$3.9
-$6.1
-$11.7
-$6.4 -$5.2 -$5.8 -$5.6
-$4.1 -$3.6 -$3.9 -$3.5 -$3.8
$3.7 $5.0 $5.5
$1.8
$3.5
$8.7
$6.2
$11.0
$9.2 $9.0
$6.6 $7.6
-$14.0
-$12.0
-$10.0
-$8.0
-$6.0
-$4.0
-$2.0
$0.0
$2.0
$4.0
$6.0
$8.0
$10.0
$12.0
$14.0
FY2005/2006
FY2006/2007
FY2007/2008
FY2008/2009
FY2009/2010
FY2010/2011
FY2011/2012
FY2012/2013
FY2013/2014
FY2014/2015
FY2015/2016
FY2016/2017
Bill
ion
s
Contributions Distributions Net Cash Flow
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Private Equity Annual Program Review
Private Equity 3-Year Rolling Excess Returns
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Private Equity Annual Program Review
PE Portfolio Key Risks
• Vintage year concentration:
44.3% of the NAV is concentrated in Vintage Years 2006 – 2008
• Transparency:
Slow adoption by other industry participants of the ILPA Fee
Reporting Template
Limited visibility on portfolio positions
• Unfunded Commitments: $14.3b
As of June 30, 2017
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Private Equity Annual Program Review
III. Business Review
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Private Equity Annual Program Review
Managing Investment
Director
Risk, Research, Analytics &
Performance / Investment
Management Group
Investment
Underwriting
Administration
Private Equity Functional Organizational Chart
As of September 1, 2017
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Private Equity Annual Program Review
Staffing Overview
• 35 total positions within Private Equity TOTAL PROGRAM
• Hired 2 investment staff
• 8 Private Equity professionals appointed to more senior positions
• 10 professionals transferred to other areas of INVO
STAFFING UPDATES
• 1 Managing Investment Director
• 1 Investment Officer
• 1 Administrative Support Staff
CURRENT VACANCIES
As of September 1, 2017
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Private Equity Annual Program Review
Program Expenses
1 The external fee information does not include the GP’s carried interest. The percentage of carried interest earned varies for each private equity partnership, but generally ranges from 10% - 20% of the
net profits of the fund, after expenses. Important to note is that our private equity partners participate in this agreed-upon carried interest profit sharing only after a minimum agreed upon return has been
obtained by the investor, and all underlying fund expenses have been incurred. The minimum agreed upon return is typically in the range of 6 – 8%. 2 All BPS fees paid figures are calculated on Total Program AUM. Some totals may not reconcile due to rounding.
FY 2016-17 FY 2015-16
AUM
($billions)
Fees & Profit
Sharing Paid
($millions)
Fees & Profit
Sharing Paid2
(BPS)
AUM
($billions)
Fees & Profit
Sharing Paid
($millions)
Fees & Profit
Sharing Paid2
(BPS)
Internal Management $ $ 8.3 3 $ $ 9.3 4
External Management1 $ 25.9 $ 828.9 320 $ 26.4 $ 899.5 341
Asset Management Fees
Paid N/A $ 234.5 91 N/A $ 207.3 79
Profit Sharing N/A $ 455.1 176 N/A $ 489.8 186
Change in Accrued Profit
Sharing N/A $139.3 53 N/A $ 202.4 77
Consultants Expense N/A $ 1.3 0
N/A $ 1.3 0
Technology & Operating
Expense N/A $ 10.0 4
N/A $ 11.3 4
Total Program $ 25.9 $ 848.5 327 $ 26.4 $ 921.4 349
FY 2016-17 Profit Sharing ($millions)
Profit Sharing Paid $455.1
FY 2016-17 CalPERS Realized Gain ($millions)
CalPERS Realized Gain $3,531.6
FY 2015-16 Profit Sharing ($millions)
Profit Sharing Paid $489.8
FY 2015-16 CalPERS Realized Gain ($millions)
CalPERS Realized Gain $3,258.8
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Private Equity Annual Program Review
Summary of PE Sustainable Investment Practices
• Due Diligence - staff is asking questions covering the following areas around the
GPs’ practices in the ESG space:
– Formal ESG policy
– Pre-investment process
– Post-investment monitoring of the holdings
• The majority of CalPERS PE’s due diligence questions on ESG overlap with the
standard UN PRI Due Diligence Questionnaire.
• Monitoring - staff is discussing ESG practices across the portfolio.
– For the top 10 managers by assets under management, staff inquires about ESG issues and
practices at the annual Limited Partner Advisory Committee (LPAC) meeting.
UN PRI Principle 1 “We will incorporate ESG issues into investment analysis and decision-making processes.”
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Private Equity Annual Program Review
Summary of PE Sustainable Investment Practices
Next Steps
CalPERS staff will engage GPs on ESG concerns
and accomplishments across the portfolio
Broader adoption of ILPA Fee and Profit Sharing
template and increased transparency remains a top
priority for CalPERS 77% of Strategic funds provided template as of Q1 2017
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Private Equity Annual Program Review
Conclusion
• Private Equity has exceeded the Global Equity benchmark
over the 5, 10 and 20 year horizon
• PEARS implementation nearly complete
• Continue to integrate Environmental, Social, and
Governance (ESG) considerations in the investment and
monitoring process