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CalPERS Selling $13bn in Equities, Increasing Exposure to Private Equity

|Includes:AINV, The Blackstone Group L.P. (BX), KCAP

The California Public Employees’ Retirement System (CalPERS), the nation’s largest public pension fund, announced yesterday that it was adjusting its asset allocation targets for its $183 billion investment portfolio. The largest change will be the shift from a 56% equity allocation to 49% allocation, which equates to an approximately $12,810 million reduction.

The equity assets will largely be reallocated to the pension fund’s private equity focused Alternative Investment Management (NYSEMKT:AIM) portfolio. AIM’s allocation will increase from 10% to 14%, representing an increase of approximately $7,320 billion. The firm’s press release did not indicate what private equity firm’s will be receiving the massive amounts of capital, although many expect significant portions will go to CalPERS’ current private equity managers. As of 6/30/08, the pension’s largest private equity managers included: The Carlyle Group with over $2,700 million, Apollo with over $1,300 mm, the Texas Pacific Group with over $1,200 mm, CVC Capital Partners with over $820 mm, Kohlberg Kravis & Roberts with over $800 mm and Blackstone (NYSE:BX) with over $680 mm. While Blackstone is the only publicly-traded firm, Carlyle and Apollo both manage publicly-traded permanent capital vehicles Apollo Investment Corp (NASDAQ:AINV) and Kohlberg Capital Corporation (NASDAQ:KCAP), respectively.

CalPERS will also be reallocating 2% or $3,660 to cash as well as 1% or $1,830 to its global fixed income portfolio. Target allocations for the fund’s real estate and inflation-linked assets were not changed, remaining at 10% and 5%, respectively.

CalPERS last changed its target allocations in January 2008 and revealed in its press release that these changes were made “in response to the misalignment of the portfolio in the wake of the financial market crisis of 2008...This is not intended to be a long-range strategy but reflects our preference for higher liquidity and moderate risk, as well as the flexibility to respond to challenges and opportunities in the markets.”

Notably, the targets are only guidelines, as the fund has set:
ranges of +/- 5 percent around targets for global equity, AIM, fixed income and real estate; and ranges of 2 percent to 5 percent for inflation-linked assets and of 0 percent to 5 percent for cash. Under the ranges, CalPERS could have 9 percent to 19 percent of its total market value in the private equity market, for example, with a target of 14 percent.
 
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