June 8 (Bloomberg) -- The California Public Employees’ Retirement System, the nation’s biggest public pension plan, is planning to increase its targets for private-equity and venture- capital investments by as much as 40 percent.

Calpers board will vote next week on a plan to boost the share of its $169 billion fund allocated to those investments to a target of 14 percent from 10 percent, Brad Pacheco, a Calpers spokesman, said in a interview. Details of Calpers’ staff recommendations for the plan were forwarded to board members late last week, he said.

Pension funds and endowments typically set allocation targets and then take pitches from private-equity firms and venture capitalists seeking to raise money. Because stock markets have fallen, the percentage of assets dedicated to those areas has risen. That means most funds are trying to cut back, making Calpers’ expansion notable, said D. Brooks Zug, a senior managing director at Harbourvest Partners LLC in Boston.

“Most long-standing investors in these assets are at or over their targets, so they’d have to take a proactive move like what Calpers is doing to invest more,” said Zug. It’s a savvy move because private-equity investments made during recessions often generate good returns, he said.

Other major investors may not be able to follow Calpers’ move, limiting its broader short-term impact on the industry, Zug said.

Asset Allocation

Today, Sacramento-based Calpers has a target of 56 percent in stocks and hedge funds, 19 percent bonds, 10 percent real estate, 5 percent in “Treasury bonds with interest rates that adjust based on inflation,” and 10 percent private equity, Pacheco said.

The proposal calls for 49 percent in stocks and hedge funds, 20 percent bonds, and 14 percent private equity. Under the new mix, Calpers plans to keep 2 percent of its assets in cash, a first for the fund, Pacheco said.

Calpers now has $22.8 billion, or 13 percent of its assets, in venture capital and buyout funds, according to the pension fund’s Web site. It has committed another $22.8 billion to private-equity funds that haven’t yet asked Calpers to send that money.

The shifts could be larger or smaller than the adjustments that the targets suggest, because Calpers policy gives managers leeway to adapt to short-term market conditions, Pacheco said.

By raising the target for private-equity and venture- capital investments, Calpers is betting on a recovery after the recession is over, said Tim Friedman, head of communications at London consulting firm Preqin Ltd. The median buyout fund raised in 2001 has returned 27 percent a year, Friedman said.

Fundraising

Private-equity fundraising fell to the lowest level since 2004 in the first quarter, according to Preqin. Global buyout firms raised $22.8 billion, 60 percent less than they did a year earlier. U.S. venture firms raised $4.3 billion in the first quarter, down 39 percent, according to the National Venture Capital Association in Arlington, Virginia.

Joseph Dear, who was named Calpers’ chief investment officer in January, came from the Washington State Investment Board, whose $61.3 billion in assets includes at least $10.5 billion for private equity, according to the board’s Web site. Washington’s new private-equity investments quintupled between 2003 and 2005, after Dear took over in November 2002, according to Preqin data.

Calpers was moving toward expanding its private-equity holdings even before Dear arrived, spokesman Clark McKinley said. The target allocation was 6 percent of Calpers’ assets until 2007, when it was raised to 10 percent, he said. The new increase is designed to reflect the larger role private equity now plays in the financial market, McKinley said in an e-mail.

To contact the reporter on this story: Tim Mullaney in New York at tmullaney1@bloomberg.net

Last Updated: June 8, 2009 09:39 EDT