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, Page 2 of 28
Program Performance Review
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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
Private Equity Annual Program ReviewItem 7c, Attachment 1, Page 3 of 28
Program Characteristics
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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
Private Equity Annual Program ReviewItem 7c, Attachment 1, Page 4 of 28
Market Environment - Fundraising
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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
Private Equity Annual Program ReviewItem 7c, Attachment 1, Page 5 of 28
Commitments by Vintage Year
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*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*
Private Equity Annual Program ReviewItem 7c, Attachment 1, Page 6 of 28
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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
Private Equity Annual Program ReviewItem 7c, Attachment 1, Page 7 of 28
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Appendix
Private Equity Annual Program ReviewItem 7c, Attachment 1, Page 8 of 28
Review Outline
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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
Private Equity Annual Program ReviewItem 7c, Attachment 1, Page 9 of 28
Investment Beliefs Key
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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.
Private Equity Annual Program ReviewItem 7c, Attachment 1, Page 10 of 28
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I. Program Overview
Private Equity Annual Program ReviewItem 7c, Attachment 1, Page 11 of 28
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 ReviewItem 7c, Attachment 1, Page 12 of 28
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
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Private Equity Annual Program ReviewItem 7c, Attachment 1, Page 13 of 28
Policy Benchmark
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Effective July 1, 2018:Custom FTSE All World, All Cap Equity + 150bps− Lagged one quarter
Private Equity Annual Program ReviewItem 7c, Attachment 1, Page 14 of 28
Program Characteristics
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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%
Private Equity Annual Program ReviewItem 7c, Attachment 1, Page 15 of 28
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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
Private Equity Annual Program ReviewItem 7c, Attachment 1, Page 16 of 28
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II. Investment Review
Private Equity Annual Program ReviewItem 7c, Attachment 1, Page 17 of 28
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
Private Equity Annual Program ReviewItem 7c, Attachment 1, Page 18 of 28
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
Private Equity Annual Program ReviewItem 7c, Attachment 1, Page 19 of 28
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 Annual Program ReviewItem 7c, Attachment 1, Page 20 of 28
Private Equity 5-Year Rolling Excess Returns
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As of June 30, 2018; Source: State Street
Private Equity Annual Program ReviewItem 7c, Attachment 1, Page 21 of 28
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: $16.0b
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As of June 30, 2018
Private Equity Annual Program ReviewItem 7c, Attachment 1, Page 22 of 28
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III. Business Review
Private Equity Annual Program ReviewItem 7c, Attachment 1, Page 23 of 28
Private Equity Functional Organizational Chart
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Managing Investment
Director
Risk, Research, Analytics &
PerformanceInvestments
Administration
As of June 30, 2018
Private Equity Annual Program ReviewItem 7c, Attachment 1, Page 24 of 28
Staffing Overview
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• 34 total positions within Private EquityTOTAL PROGRAM
• Hired 2 admin staff• 2 Private Equity professionals appointed to more senior
positions• 1 Position transferred to other program area within INVO
STAFFING UPDATES
• 1 Managing Investment Director• 1 Associate Investment Manager• 3 Investment Officers
VACANCIES
As of June 30, 2018
Private Equity Annual Program ReviewItem 7c, Attachment 1, Page 25 of 28
Program Expenses
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FY 2017-18 FY 2016-17
AUM ($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
Private Equity Annual Program ReviewItem 7c, Attachment 1, Page 26 of 28
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IV. Governance and Sustainability Integration
Private Equity Annual Program ReviewItem 7c, Attachment 1, Page 27 of 28
Summary of PE Sustainable Investment Practices
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• 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
Private Equity Annual Program ReviewItem 7c, Attachment 1, Page 28 of 28
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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