One of the things private equity folks have been saying to console themselves (and to convince investors to commit more money) lately is that a recession is the best time to invest. Assets that are now cheap will be expensive once the economy recovers, right? CalPERs, the $169 billion, 800-pound gorilla of pension funds, seems to have bought this argument and yesterday announced it is considering increasing its private equity and venture capital allocation to 14 percent of its portfolio from 10 percent
As others have noted, though, this may be less a huge vote of confidence in the genius of Leon Black et al than an acknowledgment of reality. Pension funds and endowments have seen their illiquid alternative assets allocations rise as the total value of their portfolios has fallen, the so-called “denominator effect.” People who set out to have, say, 5 percent in alternatives have found themselves with substantially more. Rebalancing is no easy thing right now; getting rid of private equity partnership shares via the secondary market means taking an enormous bath at the moment. Better perhaps just to adjust your allocation upward. It’ll be interesting to see if others follow CalPERs lead. Also interesting to see who makes the opposite choice. Pension funds and endowments need liquidity and some are going to have to sell their private equity stakes eventually no matter how much it hurts.