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Private Equity (PE) Annual Program Review

Sarah CorrInterim Managing Investment Director

Mahboob HossainInvestment Director

November 13, 2018

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Private Equity Annual Program ReviewItem 7c, Attachment 1, of 28

Program Performance Review

2

1-YR 3-YR 5-YR 10-YR 20-YRAs of June 30, 2018* Net Return Net Return Net Return Net Return Net Return Private Equity ($27.2b) 16.1% 10.4% 11.9% 9.0% 10.5%

PE Policy Benchmark 18.6% 12.3% 14.2% 13.5% 9.1% Excess Return** (2.5)% (1.9)% (2.2)% (4.5)% 1.4%

CalPERS GE Policy Benchmark(as of 3/31/18 to match PE one quarter lag)

15.6% 8.6% 9.9% 6.7% 5.9%

Excess Return 0.5% 1.8% 2.0% 2.3% 4.6%

*Source: State Street**Figures may not reconcile due to rounding


Program Characteristics

3

StrategyNet

Asset Value

Current Target*5-Year

Net Return

Buyouts $17.4 64% 65% 13.5%

Growth/Expansion $4.5 16% 15% 13.9%

Credit Related $2.6 10% 10% 5.3%

Opportunistic $1.9 7% 10% 12.8%

Venture Capital $0.8 3% <1% 4.3%

Total $27.2 100% 100% 11.9%

*Policy targets effective August 13, 2018Based on NAV as of June 30, 2018; $s in billions; Source: State Street

• All strategies are within current policy range

$27.2b Current

Net AssetValue


Market Environment - Fundraising

4

Source: Preqin*Excludes Real Estate and Infrastructure

• Strong fundraising market and record levels of dry powder ($1 trillion*) is creating a competitive environment for purchasing assets

• Global fundraising totaled $242 billion in 1H 2018

$274

$414

$490 $510

$256 $228

$289 $329

$417

$492 $492

$576 $625

$242

$0

$100

$200

$300

$400

$500

$600

$700

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 1H2018

(US $ in Billions) Fundraising by Geography

US Europe Rest of World


Commitments by Vintage Year

5

*Amount represents commitments that have not yet called capitalAs of June 30, 2018; Source: PEARS

• CalPERS PE has maintained a steady approach of capital deployment• Disciplined pacing and vintage year diversification are two key elements of our capital budgeting

$9.0

$0.9 $0.7

$1.9$2.4

$3.8 $4.2

$3.1 $2.9 $3.0$2.1

$4.9

$0.0$1.0$2.0$3.0$4.0$5.0$6.0$7.0$8.0$9.0

$10.0

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 1H2018

(US $ in Billions)

AuthorizedCommitments*


6

2017-18 Activities

2018-19 Objectives

• Committed $5.3b to new investments• Implemented reporting requirements of AB 2833• Finalized implementation of PEARS

‒ Will continue to refine digital strategy for investment analysis• Continued to review Private Equity Business Model

• Ongoing review and implementation of Private Equity Business Model• Collaborate with Global Equity on the implementation of the Growth

asset segment• Allocate up to $6.0b• Collaborate with ILPA on rollout of new portfolio company reporting

template and Due Diligence Questionnaire


7

Appendix


Review Outline

8

Pages 1 2 3 4 5 6 7 8 9 102-623

Market Environment - Fundraising 4Commitments by Vintage Year 5

6 Review Outline 8Investment Beliefs Key 9

101112 13

Program Characteristics 141516

17-1819-20

Portfolio Key Risks 2122232425262728

Program Performance ReviewProgram Characteristics

Activities & Objectives

Policy Benchmark

Investment Process

I. Program OveriewProgram RoleProgram Investment Philosophy

Investment Beliefs MapSection

Executive Summary

IV. Governance & Sustainability IntegrationProgress on Strategic Plan InitiativesConclusion

III. Business Review

Program Expenses

Functional Organizational Chart Staffing Overview

Program Performance ReviewMarket EnvironmentII. Investment Review

1 Liabilities

2 Long-Term Horizon

3 Stakeholders

4 Three Forms of Capital

5 Accountability

6 Strategic Allocation

7 Risk Reward

8 Costs Matter

9 Multi-faceted Risk

10 Resources/Process


Investment Beliefs Key

9

Short Name Investment Belief

1 Liabilities Liabilities must influence the asset structure.

2 Long-Term Horizon A long time investment horizon is a responsibility and an advantage.

3 Stakeholders CalPERS investment decisions may reflect wider stakeholder views.

4 Three Forms of Capital

Long-term value creation requires effective management of three forms of capital: financial, physical, and human.

5 Accountability CalPERS must articulate its investment goals and performance measures and ensure clear accountability for their execution.

6 Strategic Allocation Strategic asset allocation is the dominant determinant of portfolio risk and return.

7 Risk Reward CalPERS will take risk only where we have a strong belief we will be rewarded.

8 Costs Matter Costs matter and need to be effectively managed.

9 Multi-faceted Risk Risk of CalPERS is multi-faceted and not fully captured through measures such as volatility or tracking error.

10 Resources / Process Strong processes and teamwork and deep resources are needed to achieve CalPERS’ goals and objectives.


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I. Program Overview


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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Program Investment Philosophy• Long-term investment horizon

• Manager selection and alignment of interest are important to PE’s success

• Focused on allocating more capital to fewer managers

• Costs matter

12


Policy Benchmark

13

Effective July 1, 2018:Custom FTSE All World, All Cap Equity + 150bps− Lagged one quarter


Program Characteristics

14

Investment TypeNet Asset

Value(NAV)*

% ofNAV

Funds $18.0 66%

Fund-of-Funds $2.7 10%Co-Investments/Direct Investments $2.5 9%

Separate Accounts $4.0 15%

TOTAL $27.2By

Geo

grap

hy**

By In

dust

ry**

* Based on NAV as of June 30, 2018; $s in billions; Source: State Street**Based on Market Value as of March 31, 2018; Source: PEARS

Energy11%

Industrials12%

Consumer Related

21%

Health Care11%

Financials18%

Information Technology

17%

Other10%

Emerging Markets

12%

Europe23%United

States60%

Other5%


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Investment ProcessQuarterly Monitoring Report

Sourcing

Due Diligence

Investment Recommendations

Legal Negotiations

Company Level Performance

Manager, Market & Company Level Updates

Communication with Other LPs

Review of Financial Statements

Risk Analysis

Capital Allocation and Pacing

Market Overview

Cash Flow Analysis Portfolio

Diversification

Performance Attribution

Pacing AnalysisForward Calendar

ScreeningDue Diligence

Investment SelectionPortfolio RebalancingPerformance Review

Investment Review Committee (IRC)• Purpose: Consistent review

of investments and portfolio• Timing: Weekly • Participants:−1 Managing Investment

Director (MID); 2 Investment Directors (IDs); 2 Investment Managers (IMs) (PE)

−1 MID (Real Assets)−1 MID (Global Equity)−1 IM (Trust Level Portfolio

Management)−1 IM (ICOR)−Board Consultant

Processing Cash Flows


16

II. Investment Review


Market Environment – Valuations

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6.7x6.0x

6.6x7.1x 7.3x

8.4x 8.4x

9.7x9.1x

7.7x8.5x 8.8x 8.7x 8.8x

9.7x10.3x10.0x

10.6x9.8x

0.0x1.0x2.0x3.0x4.0x5.0x6.0x7.0x8.0x9.0x

10.0x11.0x

EV/EBITDA All U.S. LBO

Equity/EBITDA Debt/EBITDA Other/EBITDA

• High valuations continue to make it challenging to find attractively valued assets

Source: S&P


Market Environment – Exits & Liquidity

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Sources: Preqin; PEARS

• Exit markets were robust over the last few years• 41% increase in exits between the 1H 2017 ($105bn) and 1H 2018 ($177bn)• 10% of exits in the CalPERS PE Portfolio were Sponsor to Sponsor compared to about 25% for the

market overall

$189 $203

$314

$133$102

$273

$348 $329 $348

$485$453

$361

$288

$177

$0$50

$100$150$200$250$300$350$400$450$500

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 1H2018

(US $ in Billions)Global Exits

Other IPO Sponsor to Sponsor Strategic


Cash Flow by Fiscal Year

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-$6.1

-$11.7

-$6.4-$5.2 -$5.8 -$5.6

-$4.1 -$3.6 -$3.9 -$3.5 -$3.8 -$4.5

$5.0 $5.5

$1.8$3.5

$8.7

$6.2

$11.0$9.2 $9.0

$6.6$7.6 $7.2

-$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

FY2006/07

FY2007/08

FY2008/09

FY2009/10

FY2010/11

FY2011/12

FY2012/13

FY2013/14

FY2014/15

FY2015/16

FY2016/17

FY2017/18

(US $ in Billions) Contributions Distributions Net Cash Flow

As of June 30, 2018; Source: PEARS Cash Flow Report

• PE provided positive net cash flow of $30.7 billion since FY 2010/2011


Private Equity 5-Year Rolling Excess Returns

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As of June 30, 2018; Source: State Street


PE Portfolio Key Risks• Vintage year concentration:

34.2% of the NAV is concentrated in Vintage Years 2006 – 2008

• Transparency: Slow adoption by other industry participants of the ILPA

Reporting Templates Limited visibility at portfolio company level

• Unfunded Commitments: $16.0b

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As of June 30, 2018


22

III. Business Review


Private Equity Functional Organizational Chart

23

Managing Investment

Director

Risk, Research, Analytics &

PerformanceInvestments

Administration

As of June 30, 2018


Staffing Overview

24

• 34 total positions within Private EquityTOTAL PROGRAM

• Hired 2 admin staff• 2 Private Equity professionals appointed to more senior

positions• 1 Position transferred to other program area within INVO

STAFFING UPDATES

• 1 Managing Investment Director• 1 Associate Investment Manager• 3 Investment Officers

VACANCIES

As of June 30, 2018


Program Expenses

25

FY 2017-18 FY 2016-17

AUM ($billions)

Fees & ProfitSharing Paid ($millions)

Fees & Profit Sharing Paid2

(BPs)

AUM ($billions)

Fees & Profit Sharing Paid ($millions)

Fees & Profit Sharing Paid2

(BPs)Internal Management $ $ 6.3 2 $ $ 8.3 3

External Management1 $ 27.2 $ 678.8 250 $ 25.9 $ 689.6 267

Asset Management Fees Paid N/A $ 247.7 91 N/A $ 234.5 91

Profit Sharing Paid N/A $ 431.1 159 N/A $ 455.1 176

Consultants Expense N/A $ 0.7 0 N/A $ 1.3 0Technology & Operating Expense N/A $ 8.6 3 N/A $ 10.0 4

Total Program3 $ 27.2 $ 694.3 256 $ 25.9 $ 709.2 274

FY 2017-18 Profit Sharing ($millions)Profit Sharing Paid $431.1FY 2017-18 CalPERS Realized Gain ($millions)CalPERS Realized Gain $3,496.6

FY 2016-17 Profit Sharing ($millions)Profit Sharing Paid $455.1FY 2016-17 CalPERS Realized Gain ($millions)CalPERS Realized Gain $3,531.6

1The 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%. 2All BPs fees paid figures are calculated on Total Program AUM3Some totals may not reconcile due to rounding


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IV. Governance and Sustainability Integration


Summary of PE Sustainable Investment Practices

27

• PE collaborated with IMEP and respective INVO asset class representatives to finalize ‘Private Equity ESG and Sustainable Investment Practice Guidelines’ in December 2017

• Surveyed General Partners (GPs) on sustainability practices – Results highlight increasing SI dedicated resources and process

implementation among strategic GPs

• Going forward, additional SI integration opportunities include: – Annual surveys to benchmark versus 2018 baseline results– PE Due Diligence Questionnaire enhancements– Collaborate with ILPA on D&I Initiatives related to DDQ and Code of

Conduct

PE Sustainable Investments (SI) Implementation


Conclusion• Private Equity has exceeded the Global Equity

benchmark over the 5, 10 and 20 year horizon

• Continue to integrate Sustainable Investment considerations in the investment and monitoring process

• Ongoing review and implementation of Private Equity Business Model

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