Over the past year, the US’s largest public pension system, CalPERS, has been making some interesting moves. CalPERS has been making commitments to private equity funds much smaller in size than it has traditionally targeted, including growth-oriented and venture capital vehicles.

Historically, CalPERS has built its private equity portfolio to reflect its own massive size – choosing large funds into which it could make sizable investments that gave it outsized influence on the GP and potential access to choice economics and terms.

This is the expected strategy for an institution as large as CalPERS. Making commitments worth hundreds of millions of dollars is a way to spark meaningful performance in the overall portfolio; smaller commitments are seen to not matter as much, as they would have de minimis impact on overall performance.

But over the past year, CalPERS has made commitments to funds like Base 10 Advance Initiative II, to which the system invested $50 million in 2023; Butterfly Equity II; Crosspoint Capital II; Muir Woods Partners; Oak HC/FT Fund V; and Prysm Capital.

This is a collection of newer firms and funds – not to mention smaller – that are mostly operating around growth and tech strategies.

More growth and venture

The system’s goal is to shift its private equity mix to around 60 percent buyout and 40 percent growth/venture, a departure from the 80/20 split just two years ago.

Growth investing, as opposed to outright buyouts, “is based on creating opportunity and adding value through growth, not cost cutting,” Anton Orlich, CalPERS’ head of private equity, said at an investment committee meeting earlier this year.

The shift in focus comes as the system, which managed $498.8 billion in assets as of June, has significantly increased its spending on private equity. CalPERS has over the years fluctuated its pace to PE, downshifting in more challenging years and ramping up in bull market periods.

But over the last two years, amid market uncertainty and a slowdown in fundraising, the system has committed to a strong pace of commitments to private markets. Orlich led the rapid growth of the private equity program at healthcare system Kaiser Permanente, which grew from about $6 billion in 2019 to around $33 billion in assets by 2021.

CalPERS ramped its allocation target to private equity to 17 percent from 13 percent this year and committed to a goal of investing in “diverse managers while moving away from large buyout,” according to a CalPERS statement from earlier this year.

Reflecting its rampant pacing, CalPERS made 66 private equity commitments in 2023, making it the most active private equity LP in North America last year, according to Buyouts data. The largest commitment CalPERS made last year was a $750 million commitment to Silver Lake Investors VI, according to our data. CalPERS had by far the highest growth in PE investing out of the 50 largest LP institutions in North America, increasing by about 35 percent from the prior year.

New York State never sleeps

While CalPERS was the most active North American LP in 2023, according to Buyouts data, the second-most active was New York State Common Retirement Fund, with 43 commitments. The system, which managed about $248.5 billion as of March, allocated around 14.7 percent of its assets to private equity, PEI said.

New York Common has also moved a bit toward CalPERS’ strategy of seeking smaller funds. The system last year committed $100 million to a first-time fund managed by L2 Point Management, accounting for one-third of the fund’s $300 million target.

While CalPERS and New York Common were the busiest LPs, they weren’t necessarily the largest LP institutions in North America. That distinction goes to CPP Investments, which managed around $142 billion in private equity assets for an allocation of 32 percent of total assets, according to Buyouts research.

CPP Investments outstripped all other North American institutions in the total amount it committed to private equity. CalPERS is the second-biggest PE investor among North American LPs, with about $68 billion in private equity assets, for an allocation of about 14 percent.

Among the top 10 LP institutions in the region, all are public pension systems. That fact is significant in that capital has shifted over the years from the public pension universe into other areas, including increasingly the retail channels. Yet, as seen in the research, North American public pensions remain the most significant capital allocators to PE.

For a system like CalPERS, investment staff believe private equity is a vital driver of performance. The system has followed a blistering pace to PE investing, committing $15 billion per year in recent years, with a significant amount flowing into co-investments.

A big part of CalPERS’ strategy is to back smaller managers in a meaningful way, and through its outsized influence attain access to co-investing, which has become a primary goal for many LP institutions.

Co-investment, offered on a no-fee, no-carry basis, can be a big mover of performance and growth for institutions, not to mention potential risk. While fund investing draws down an LPs’ capital over time for exposure into a diverse pool of underlying investments, co-investing puts the LPs’ cash directly into one company.

With that single-asset risk, many large institutions strive to build diverse portfolios of co-investments to alleviate concentration risk.

CPP has a long history of directly investing alongside GPs, and in many instances, actively competing against PE firms. Its complexion as the largest LP in North America differs from that of its closest peer, CalPERS. CPP has built its reputation in recent years as a direct investing LP that uses fund investments to access co-investing.

CalPERS, steadily moving in that direction, is still more of a fund investing LP, with a large legacy portfolio. The years may change that configuration as the system continues to build its direct exposure.

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