Staff at the California State Teachers’ Retirement System (CalSTRS) presented the fund’s investment committee with a proposal that would increase the current portfolio allocation and introduce procedural changes that would make such investments easier. The category currently represents less than 5% of the fund’s commitment to alternative investments, mostly in Funds or with groups well-known to CalSTRS.
CalSTRS believes that the category has the potential to increase returns for the $116+ billion fund, as well as offering reduced risk for an investor with CalSTRS investment expertise.
Limited partnerships are very illiquid securities, typically with ten-year terms, and not traded in public markets, according to the proposal. The secondary market is often the only option for investors desiring to liquidate their investments in limited partnerships prior to the scheduled expiration date.
The committee believes that the illiquidity of the market, coupled with the liquidity needs of sellers creates an opportunity to invest in the secondary market at this time, noting that:
- Many investors are at or beyond their approved allocations to private equity and may be looking to scale back that investment
- the secondary market can facilitate changes to existing private equity investments, or provide new investors to achieve better diversification in those portfolios
- limited partners may want to free up capital to make commitments to new limited partnerships
- Market volatility may send some investors in search of liquidity
- Many investors new to the sector may re-evaluate their commitment to private equity and may seek to divest holdings
- Mergers and acquisitions activity may create blended interests that need to be separated
The proposal will be considered at the CalSTRS investment committee meeting on April 4.
CalSTRS posted a whopping 78.6% return on its private equity portfolio in the year to June 2000, and an average annual return of 41.6% over the last three years according to Reuters.
Separately, CalSTRS reported it has allocated 5% of its total assets for real-estate investments, to both diversify and provide stable cash flow.