CalSTRS to Consider Upping PE Allocation

May 25, 2005 ( - Staff members of the California State Teachers' Retirement System (CalSTRS) have recommended that the $125 billion pension fund step up its commitment to the buyout markets.

The recommendation calls for CalSTRS to make the move both by decreasing its venture capital allocation, as well as by boosting the ceiling on the amount the fund can put into any single private equity fund, according to a Dow Jones news report.

CalSTRS will vote at its July meeting on the proposals after discussing them in June. As it stands now, the first proposal would cut the pension fund’s target venture capital allocation to 15% from 25%, and boost the buyout allocation to 70% from 60% of the firm’s current 8% allocation to alternative investments. That would work out to roughly $1 billion more being available for buyout commitments for the total $125.2 billion portfolio, according to the Dow Jones report.

The fund’s staff said in a  document discussing the recommendations that the buyout sector is growing faster than the venture capital sector so the private equity portfolio’s exposure to venture capital has been falling anyway.  Another pension fund, Ohio Public Employees’ Retirement System, made a similar move last year, cutting its venture target allocation to 15% from 25 % of its overall PE target allocation, or by $240 million, Dow Jones said.

A second CalSTRS proposal would increase the amount that the pension fund can commit to funds being raised by firms that it has backed before to $500 million from $400 million. It would also hike the amount the pension fund can commit to funds whose teams it hasn’t backed before to $250 million from $100 million.

That language closely mirrors that of CalSTRS’ sister fund, California Public Employees’ Retirement System (CalPERS), which just approved a similar proposal allowing it to invest up to $800 million in any single ‘top-quartile’ fund and up to $200 million in ‘second-quartile’ funds without approval from its board of administration.

CalPERS senior investment officer Leon Shahinian said in an e-mail that “Even the largest mega funds have had to cut investors back. Having the flexibility to commit large amounts to the best groups and being quick and nimble gives us a competitive advantage,” Dow Jones reported.