Private Equity Annual Program Review - CalPERS · PDF file14.11.2016 · 2 Item 8a -...

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Item 8a - Attachment 1, Page 1 of 29

Private Equity

Annual Program Review

Réal Desrochers Managing Investment Director

Sarah Corr, Christine Gogan & Mahboob Hossain

Investment Directors November 14, 2016

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Private Equity Annual Program Review

Program Performance Review

1-YR 3-YR 5-YR 10-YR 20-YRAs of June 30, 2016* Net Return Net Return Net Return Net Return Net Return PRIVATE EQUITY 1.7% 10.0% 9.7% 10.2% 11.4%

PE POLICY BENCHMARK (0.8)% 10.8% 10.6% 12.7% 10.1% Excess Return 2.5% (0.8)% (0.9)% (2.6)% 1.4%

Current ALM Return Expectation 9.3% 9.3% 9.3% 9.3% 9.3% Excess Return (7.6)% 0.7% 0.4% 0.9% 2.1%

CalPERS GE Policy Benchmark (4.0)% 6.5% 5.9% 5.0% 6.5% Excess Return 5.7% 3.5% 3.8% 5.2% 4.9%

*Source: My State Street Monthly CIO Report & 2013 ALM Workshop

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Program Characteristics

Investment Type

Net Asset Value (NAV)

As of 6/30/16

% of NAV As of

6/30/16

Net Asset Value (NAV)

As of 6/30/12

% of NAV As of

6/30/12

Funds $17.7 67% $27.2 80%

Fund-of-Funds $3.8 15% $4.0 12%

Co-Investments/ Direct Investments $1.8 7% $1.8 5%

Separate Accounts $2.9 11% $1.1 3%

TOTAL $26.4* $34.3**

*Includes currency and distributed securities in the amount of $193mm ** Includes currency and distributed securities in the amount of $181mm ***Based on Market Value as of March 31, 2016 Source: State Street; Private Equity Accounting and Reporting Solution (PEARS)

By G

eogr

aphy

***

By In

dustr

y***

Energy 8% Industrials

11%

Consumer Related

23% Health Care

12%

Financials 17%

Information Technology

15%

Other 14%

Emerging Markets

13%

Europe 22% United

States 61%

Other 4%

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• Private Equity Accounting and Reporting Solution (PEARS) went live • Secondary transaction • Transparency – Institutional Limited Partners Association (ILPA) Template • Committed to separate accounts with improved economics

2015-16 Accomplishments

• Allocate up to $4 Billion • Review Private Equity’s benchmark • Continue to reduce complexity • Examine Business Model • Further PEARS integration

2016-17 Objectives

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Program Expenses

a All BPS fees paid figures are calculated on Total Program AUM b Some totals may not reconcile due to rounding c Does not include Management Fees paid by the underlying Funds in the Fund of Fund. These fees totaled approximately $46 million d In addition to Management Fees, Partnership Expenses were included in this figure (Legal fees, Audit fees, etc.). Partnership Expenses in FY 2015-16 total approximately $75 million

FY 2015-16 FY 2014-15

AUM ($billions)

Fees Paid ($millions)

Fees Paida

(BPS) AUM ($billions) Fees Paid ($millions)

Fees Paida (BPS)

Internal Management $ $ 9.3 4 $ $ 8.2 3

External Management (net) $ 26.4 $206.5c 78 $ 29.0 $ 414.1d 143

Consultants Expense N/A $ 1.3 0 N/A $ 2.0 1

Technology & Operating Expense N/A $ 11.3 4 N/A $ 7.4 3

Total Programb $ 26.4 $228.4 86 $ 29.0 $ 431.7 149

FY 2015-16 Profit Sharing ($millions) Profit Sharing Distributed $539.0

FY 2015-16 CalPERS Realized Gain ($millions) CalPERS Realized Gain $3,258.8

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Appendix

7



Pages 1 2 3 4 5 6 7 8 9 102-5234 5

Review Outline 78910 11

Program Characteristics 121314

15-1718

19-20Portfolio Key Risks 21

222324

Strategic Initiatives & Projects Update 25-26Fee & Profit Sharing Transparency 27Sustainable Investment Practices 28

29

IV. Business ReviewFunctional Organizational Chart Staffing Overview

Conclusion

Program Performance Review

Market EnvironmentIII. Portfolio Positioning

Investment Beliefs MapSection

Program Expenses

Executive SummaryProgram Performance ReviewProgram CharacteristicsAccomplishments & Objectives

Policy Benchmark

Investment ProcessII. Market Environment

I. Program OveriewProgram RoleProgram Investment Philosophy

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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I. Program Overview

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Private Equity: Program Role • Primary Role

− Private Equity allocations are a means of enhancing equity returns through a value-added approach to investment management of a diverse set of portfolio companies and to capture the illiquidity premium. The major driver for returns is appreciation, with negligible cash yield.

− ALM Workshop 2013

• Driver of total performance – Price appreciation

• Risks – Growth risks – Illiquid – Leverage – Unfunded commitments

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Program Investment Philosophy • Long-term investor

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

• Over-diversification negatively impacts performance

• Costs matter

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Current Policy Benchmark

2/3 FTSE US + 1/3 FTSE ROW* + 300bps

*(2/3 FTSE U.S. Total Market Index + 1/3 FTSE All World ex-U.S. Total Market Index) + 300 bps lagged by one quarter.

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Program Characteristics

*Based on NAV as of June 30, 2016; $s in billions; Includes currency and distributed securities in the amount of $193mm Source: State Street

57%

17%

11%

10% 5%

Strategy Net Asset Value* Current* Target

Buyouts $15.1 57% 60%

Growth/Expansion $4.4 17% 15%

Credit Related $2.8 11% 15%

Opportunistic $2.6 10% 10%

Venture Capital $1.3 5% <1%

Total $26.4 100% 100%

$26.4b Current

Net Asset Value*

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Investment Process Investment Review Committee (IRC) • Purpose: Consistent review of

investments and portfolio • Timing: Weekly • Participants:

− 1 Managing Investment Director (MID); 3 Investment Directors (IDs) (PE)

− 1 MID (Real Assets) − 1 ID (Global Fixed Income) − 1 Investment Manager (IM)

(Asset Allocation) − 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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II. Market Environment

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Source: Preqin * Includes the following strategies: Buyout, Growth, Distressed/Mezzanine and Venture

Market Environment - Fundraising

• Strong fundraising market and record levels of dry powder ($954 billion*) creating competitive environment for purchasing assets

• Fundraising for Buyout strategy accounted for nearly half of overall fundraising in 1H 2016

$169

$280

$424

$503 $514

$262 $226

$288 $311

$408 $426 $447

$217

$0

$100

$200

$300

$400

$500

$600

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1H 2016

(US $ in Billions) Fundraising by Geography

US Europe Rest of World

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Source: Preqin

Market Environment – Valuations

• High market prices continue to make it challenging to find attractively valued assets • Average debt multiples in the U.S. declined from 5.8x/EBITDA in 2014 to 5.3x/EBITDA in 1H 2016

7.3x 8.4x 8.4x

9.7x 9.1x

7.7x 8.5x 8.8x 8.7x 8.8x

9.7x 10.3x 10.1x

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

EV/EBITDA U.S. LBO Purchase Price Multiples

Debt/EBITDA Equity/EBITDA

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Source: Preqin

Market Environment – Exits & Liquidity

• Exit markets have been extremely robust over the last few years but slowing down in 1H 2016 amidst decrease in M&A and IPO activity

$82

$189 $202

$308

$133 $97

$266

$347 $324 $338

$470 $426

$159

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1H 2016

(US $ in Billions) Global PE Exits

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III. Portfolio Positioning

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Commitments and Unfunded

As of June 30, 2016 Source: Private Equity Accounting and Reporting Solution (PEARS)

$8.5

$11.9

$9.6

$0.9 $0.7 $1.9 $2.4

$3.8 $4.2 $3.0 $3.3

$13.7

$20.3 $22.0

$19.9

$15.5

$12.7

$10.2 $11.0

$13.1 $14.2 $13.7

$0.0

$5.0

$10.0

$15.0

$20.0

$25.0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Billio

ns

Commitment by Vintage Year Cumulative Unfunded

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Cash Flow by Fiscal Year


-$3.9 -$6.1

-$11.7

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

-$4.1 -$3.6 -$3.9 -$3.5

$3.7 $5.0 $5.5

$1.8 $3.5

$8.7 $6.2

$11.0 $9.2 $9.0

$6.6

-$14.0

-$10.0

-$6.0

-$2.0

$2.0

$6.0

$10.0

$14.0

FY2005/2006

FY2006/2007

FY2007/2008

FY2008/2009

FY2009/2010

FY2010/2011

FY2011/2012

FY2012/2013

FY2013/2014

FY2014/2015

FY2015/2016

Billio

ns

Contributions Distributions Net Cash Flow

• PE provided net cash flow of $24.2 billion since FY 2010/2011

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PE Portfolio Key Risks

• Vintage year concentration: – 53.3% of the NAV is concentrated in Vintage Years 2006 – 2008

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

Reporting Template

• Fund of Funds: – In general, are a low returning asset, and are very slow to

return cash

As of June 30, 2016

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IV. Business Review

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Investment

Management

MID

Risk, Research,

Analytics & Performance

Investment

Underwriting

Administration

Functional Organizational Chart

CalPERS Private Equity Program

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Staffing Overview

• 50 total positions within Private Equity TOTAL PROGRAM

• Hired 8 investment and administrative staff • Promoted 5 Private Equity professionals STAFFING UPDATES

• 1 Associate Investment Manager • 4 Investment Officers CURRENT VACANCIES

As of June 30, 2016

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Private Equity Vision 2020

PE Portfolio

Strategic Portfolio: Funds, Separate Accounts, Compounding

Capital, Co-Investments

• Since inception Net IRR: 15.9%

Actively Managed Legacy Portfolio

• Since inception Net IRR: 8.7%

Reduce complexity by concentrating the portfolio Focus on cost effective structures with better alignment Organize the portfolio into two categories:


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PE Projects Update

Project Objectives Accomplishments & Upcoming Activities

Transparency Support industry-wide transparency initiatives through ILPA and other industry participants

Supported ILPA on Fee Transparency Initiative

PEARS

Implement a new service and technology solution to manage and account for private equity portfolio data and activity while increasing PE data transparency

• Monitoring and performance report automation

• On-going implementation

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PE Fee & Profit Sharing Transparency Objective • Industry adoption of the Institutional Limited Partners Association (ILPA) framework for transparency of fees and profit

sharing Key Performance Indicators • Ensure 100% of CalPERS strategic private equity partnerships complete the ILPA fee reporting template and provide

profit sharing information within 5 years

63% 71% 73% 74%

43%

53% 50% 51%

Q3 2015 Q4 2015 Q1 2016 Q2 2016

Quarterly ILPA Fees Templates % of Strategic Funds Submitted % of Other Funds Submitted

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Summary of PE Sustainable Investment Practices

Screening • Manager Assessment Tool (MAT)

Diligence

• Due diligence questions and discussions with General Partner • ESG Section of Final Diligence Report (circulated to IRC members, PE Staff, CIO, COIO) • Discuss ESG issues identified at Investment Review Committee, as appropriate

Contracting

• Standard contract language across asset classes which has been incorporated into standard side letter: • Managers have, or will commit to have, an investment process which incorporates ESG factors • Managers will incorporate relevant ESG factors and Sustainable Investment activities into reporting

Monitoring

• Document ESG-related issues in periodic meeting notes prepared for review at IRC • For top 10 managers, inquire about ESG at annual LPAC meeting

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Conclusion • Private Equity (PE) has met the return expectation of the Asset

Liability Management (ALM) Assumptions over the 3, 5, 10 and 20 year horizon

• PE is progressing with significant restructuring and portfolio rebalancing

• PEARS has been operational for a year and functionality continues to be built out

• Environmental, Social, and Governance (ESG) considerations integrated in the investment and monitoring process

• Overall, PE is progressing, reducing costs and complexity

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Private Equity Annual Program Review - CalPERS · PDF file14.11.2016 · 2 Item 8a -...

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