CalPERS Achieves 11.6% Return Through Private Equity and Debt Investments

The California Public Employees Retirement System (CalPERS) has announced an notable annual investment return of 11.6% for the fiscal year concluding on June 30. This strong performance has propelled the fund’s total assets to a substantial $556.2 billion.

Public equities were once again the star performers, delivering a remarkable 16.8% return. However, CalPERS’ strategic expansion into private markets is also yielding significant dividends, with private equity and private debt strategies posting healthy gains of 14.3% and 12.8%, respectively. This indicates the success of CalPERS’ broadened focus on these less traditional asset classes.

CIO Stephen gilmore expressed satisfaction with the results, stating, “Despite some market headwinds earlier in the year, our investment strategy paid off. The team remains poised to take advantage of investment opportunities as they develop and to strike the best possible deals to boost returns and cut costs for the fund.”

The improved private equity returns are attributed to a strategic overhaul in 2022 that prioritized co-investments and separate accounts. This shift has enabled CalPERS to reduce its management fees by approximately 10% over the past few years. this year’s 14%+ private equity return represents a notable increase compared to the 10.9% gain recorded in the previous fiscal year.

In the fourth quarter of 2024 alone,CalPERS committed $4.8 billion across a diverse range of private equity funds,co-investments,and custom funds-of-one. significant allocations were made to prominent managers such as Patient Square Capital ($750 million to its Blackwell Capital Partners), EQT, TA Associates, General Catalyst, and Andreessen Horowitz. As of May, CalPERS’ private equity holdings constituted approximately $97 billion, representing about 18% of its total portfolio.

Private debt, officially recognized as a distinct asset class by calpers in 2022, continues to demonstrate considerable growth, with assets now exceeding $20 billion. During the final quarter of 2024, the system allocated $8.5 billion to various diversified credit strategies, including those focused on real estate debt. While the 12.8% annual return for private debt is strong, it is indeed slightly lower than the 17% gain achieved in the prior year.

The real assets portfolio has also seen a positive turnaround, recovering from previous losses to achieve a 2.7% gain. This marks a significant enhancement from the 7% decline experienced in the year ending June 2024.

Collectively, these results underscore the effectiveness of CalPERS’ balanced investment approach. By combining traditional public equities with a growing portfolio of private market investments, the nation’s largest public pension fund is maintaining strong performance and cost efficiency, successfully navigating ongoing market uncertainties.

How does CalPERS mitigate teh illiquidity risk associated with its private equity and debt investments?

Performance Breakdown: A Deep Dive into CalPERS’ Success

the California Public Employees’ Retirement System (CalPERS), the largest public pension fund in the U.S., recently announced an remarkable 11.6% net return on its investments for the fiscal year ending june 30, 2025. This significant gain was largely fueled by strategic allocations to private equity and private debt – option investments that have become increasingly crucial for institutional investors seeking higher yields in a low-interest-rate surroundings. the total fund value now stands at approximately $529 billion.

This performance surpasses calpers’ actuarial assumption of 6.8%, putting the fund in a stronger position to meet its long-term obligations to over 2.5 million California public employees, retirees, and their families. Understanding how CalPERS achieved this return requires a closer look at its investment strategy and the specific asset classes driving growth.

The Rise of Alternative Investments in Pension Funds

For decades, CalPERS primarily focused on conventional asset classes like public equities and fixed income. though, evolving market conditions and the need to generate consistent returns have led to a significant shift towards alternative assets. These include:

Private Equity: Investments in companies not listed on public stock exchanges. This offers potential for higher growth but also carries increased risk and illiquidity.

Private Debt: Lending directly to companies,bypassing traditional banks. This can provide attractive yields, particularly in a constrained credit market.

Real Estate: Direct ownership of properties or investments in real estate investment trusts (REITs).

Infrastructure: Investments in essential public services like transportation, energy, and utilities.

calpers’ allocation to alternative investments has steadily increased over the past decade, now representing a ample portion of its portfolio. This strategic move has proven particularly beneficial in the recent fiscal year.

Private Equity: The Engine of Growth

Private equity investments contributed significantly to CalPERS’ 11.6% return. Several factors drove this success:

Strong Exit Environment: A robust market for initial public offerings (IPOs) and mergers & acquisitions (M&A) allowed CalPERS to realize substantial gains from exiting its private equity holdings.

Operational Improvements: CalPERS’ private equity managers actively worked with portfolio companies to improve their operations, increase profitability, and drive value creation.

Sector Focus: Strategic investments in high-growth sectors like technology, healthcare, and consumer discretionary proved particularly lucrative.

Vintage Year Diversification: CalPERS maintains a diversified portfolio of private equity investments across different vintage years (the year the fund was launched), mitigating risk and smoothing out returns.

specifically, investments in technology-focused private equity funds and direct investments in rapidly growing software companies yielded remarkable results.

Private Debt: A steady Source of Income

While private debt may not have generated the same level of outsized returns as private equity, it played a crucial role in stabilizing the portfolio and providing a consistent stream of income.

Key benefits of CalPERS’ private debt strategy include:

Higher Yields: Private debt typically offers higher yields than publicly traded bonds, compensating investors for the increased risk and illiquidity.

Diversification: Private debt provides diversification benefits, as its returns are often less correlated with traditional asset classes.

Floating Rate Exposure: A significant portion of CalPERS’ private debt portfolio consists of floating-rate loans, which benefit from rising interest rates.

Direct Lending: CalPERS increasingly engages in direct lending, cutting out intermediaries and capturing a larger share of the yield.

CalPERS’ Investment Strategy: A Long-Term Outlook

CalPERS’ success isn’t solely attributable to short-term market conditions. It’s rooted in a well-defined, long-term investment strategy that emphasizes:

1. Diversification: Spreading investments across a wide range of asset classes, geographies, and sectors.
2. Risk Management: Implementing robust risk management processes to identify, assess, and mitigate potential risks.
3. Active Management: Utilizing both internal and external managers to actively manage the portfolio and generate alpha (returns above the benchmark).
4. Cost Control: Minimizing investment costs to maximize net returns.
5. ESG Integration: Increasingly incorporating environmental, social, and governance (ESG) factors into investment decisions.

The future of CalPERS’ Alternative Investment Strategy

Looking ahead, CalPERS is expected to continue increasing its allocation to alternative investments, particularly private markets. However, the fund is also mindful of the challenges associated with these asset classes, including:

Illiquidity: private equity and debt investments are less liquid than publicly traded securities, making it difficult to quickly sell them if needed.

Valuation Complexity: Valuing private assets can be challenging, as there is no readily available market price.

Due Diligence: Thorough due diligence is essential to identify and assess the risks associated with private investments.

Fee Pressure: Private equity and debt managers typically charge higher fees than traditional asset managers.

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