May 17, 2018 / 11:09 PM / a year ago

CalPERS to build $13 bln in-house private equity funds

NEW YORK, May 17 (Reuters) - The largest U.S. public pension fund plans to set up two funds managing up to $13 billion to invest directly in leveraged buyouts, it said on Thursday, underscoring how major investors are looking to lessen their dependency on private equity firms.

The decision by the California Public Employees’ Retirement System (CalPERS), which manages $349 billion, follows similar moves by Canadian funds to staff up on direct investment teams in an effort to save money in fees in private equity firms.

Investing directly by leading one’s own deals goes a step beyond what some large pension and sovereign wealth funds have done in recent years, which is to team up with private equity firms to co-invest in corporate takeovers.

“We believe it will drive stronger private equity returns and help achieve economies of scale over time,” CalPERS’ chief investment officer, Ted Eliopoulos, said in a statement.

Private equity firms buy companies with the expectation of selling them a few years down the line for a profit. The industry pulled in a record amount of cash last year as investors turned to the asset class for public-market-beating returns.

However, larger money managers are keen to cut down on paying the fees demanded by firms, which typically collect a roughly 1.5 management fee and a 20 percent cut of any profits.

“The move by CalPERS is part of a broader trend amongst large institutional LPs, led by large Canadian pension, looking to disintermediate traditional fund managers to lower the cost of private equity and venture capital investment,” said James Gelfer, senior analyst at financial data firm PitchBook.

CalPERS Direct, which is expected to begin work in 2019 subject to final board approval and would only invest CalPERS money, would be made up of two funds. The first would target late-stage investments in technology, life sciences and healthcare, and the second on long-term investments in established companies.

CalPERS said its private equity program, which began in the early 1990s, has been the fund’s highest-returning asset class over the last two decades.

CalPERS in February said it lost 4.6 percent in value during the stock market’s tumble earlier this year, highlighting the appeal of private markets.

Reporting by Joshua Franklin in New York Editing by Leslie Adler

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