The California State Teachers’ Retirement System
expects that co-investments will account for a third of its annual commitments
to private equity by as soon as 2024 – a move that will help the system save
hundreds of millions of dollars per year.
Speaking to the CalSTRS’ Investment Committee, Deputy Chief Investment
Officer Scott Chan said that the system’s co-investment program has
grown from accounting for 5% of the annual value of PE commitments four to five
years ago to today being 20% to 25%.
“We believe that we can get to 30% to 35% in the next two to three years and
potentially we can optimize the portfolio and move beyond that,” Chan said.
Co-investments are a big part of CalSTRS’ Collaborative
Model 1.0, which was established to reduce costs, control risks and ideally
boost returns. In addition to co-investing, the model includes managing more
assets in-house and acquiring interests in managers. CalSTRS and its neighbor,
the California Public Employees’ Retirement System (CalPERS), have both seen
co-investing and direct investing as crucial to generating the returns needed
to make their pension funds successful.
According to data presented at the meeting, the
Collaborative Model has saved $1.2 billion since being implemented in 2017 –
including $437 million in 2021. That’s up from $308.9 million in 2020.
CalSTRS is currently working to put in place Collaborative Model 2.0, which is
aimed at reducing costs further. Chan was scheduled to make a presentation on
Collaborative Model 2.0 to the investment committee in closed session, but he
said CalSTRS CIO Christopher Ailman’s goal to save $300 million per year
over the next five years “is achievable.”
As of December 31, 2021, CalSTRS’ total portfolio was $338 billion, a 29%
increase over the $262 billion that it had at the end of 2020. Thanks to the
Collaborative Model generating 9% of saving, total portfolio costs for the year
were at $1.8 billion, a 20% increase. Including carried interest, the figure
jumps to $2.9 billion, or a 35% increase.
At the end of September, the CalSTRS portfolio was valued at $288.6 billion.
Private equity comprised 16%. For the fiscal year ended June 30, private equity
generated a return of 23% – second only to real estate, which returned 27%.
Chan said the “heart of the collaborative model” is “what is
going to bring the most cost value.” Achieving that could, he said, come via a
joint venture, an ownership interest or through a co-investment. CalSTRS, said
Chan, is focused on being a “global partner.”
CalSTRS’ efforts to up its co-investing has resulted, he said, in it being a
“better partner.” Through the hiring of “more experts” within its private
markets segment, CalSTRS has developed a “knowledge base that is similar to
them,” Chan said. The system also has gotten quicker in providing a yes or no
to a prospective transaction, which he said that its partners “love.”
He added that “we endeavor to become the partner of choice” and that
co-investments have become “win-win” situations.
However, neither Chan nor Stephen McCourt, co-CEO of
consultant Meketa, thought that the increased interest in co-investing
by CalSTRS and others would result in lower fees for investing in funds.
Investment firms, said McCourt, see offering co-investments
with little or no fees as a means to reduce the overall fees that investors
like CalSTRS are paying.
“We aim to maximize the value for our constituents,” Chan said. “We’ll
negotiate lower costs, or we’ll share with the manager. Will that eventually
bring down fees in the industry? I’m a little bit skeptical.”