CalPERS’ Alternatives Portfolio Shows Growing Real Estate and Infrastructure Investments

Over the past four years, the US’s largest defined-benefit public pension fund has upped its allocations to asset classes with the potential for low volatility and more dividend-like returns

For an LP as big as CalPERS, navigating a once-in-a-lifetime crisis like COVID-19 presents unprecedented challenges. Before COVID-19 hit, investors faced with persistently low interest rates and rising liabilities flocked to private capital, and private equity in particular, looking to boost asset returns. The US’s largest defined-benefit public pension fund – with more than $400bn in AUM – has a long, well-established track record as a private equity investor. But how has CalPERS’ alternative asset allocation evolved in recent years?

Preqin data shows a more defensive stance. Over the past five years, CalPERS’ alternative asset allocation has shifted toward asset classes with the potential for low volatility and more dividend-like returns, such as infrastructure and real estate. Between 2016 and January 2020, CalPERS’ real estate allocation increased from 42% of its alternative assets portfolio to around 51%, while its infrastructure allocation rose from 3% to 7%. Over the same period, its private equity allocation within that portfolio dipped, from 43% to 37%.

Might CalPERS adapt its approach if COVID-19 results in lower prices for buyout assets? Possibly. In July, when CalPERS reported the 12-month performance of its investments (through 31 March 2020), the pension fund said that the net rate of return for its private equity holdings had fallen by 5.1%. Preliminary private equity returns suffered because of a “steep drop in economic activity during a period of unprecedented change,” according to CalPERS’ previous CIO, Ben Meng, who left in August. 

But, as CalPERS notes, private equity has been its highest-returning asset class, with 10-year annual returns of 10.4% and 20-year annual returns averaging 7.5%. And private equity funds that began investing in the aftermath of the Global Financial Crisis outperformed. If the economy bounces back in the coming quarters, CalPERS might well decide that it can afford to be a little more aggressive in the space.