Calpers Turns to Separately Run Private Equity Accounts

The California Public Employees’ Retirement System, the biggest U.S. pension, will pursue separately managed accounts for its future investments with private equity.

“It’s our preference to use these structures moving forward,” spokesman Joe DeAnda said Thursday in an e-mail. Existing accounts won’t be shifted to separate pools of capital.

The managed accounts, where a customer’s capital is invested separately rather than mixed with that of other clients in a traditional fund, offer cheaper fees and more control for investors. Clients known as limited partners in turn agree to commit large sums for longer.

The $303 billion pension fund is working on plans to reduce costs as it struggles with the increasing burden of benefits promised to government workers. It has about 77 percent of the money it needs to cover pensions for state and local employees. When investment returns fall short of its 7.5 percent target rate, taxpayers make up the difference.

To lower fees it pays out, Sacramento, California-based Calpers said on Monday it will cull the number of external managers it hires to about 100 from 212 over the next five years. The number of private equity managers will fall to about 30 from 100.

Last year, Calpers said it was divesting all $4 billion of its investments with hedge funds, calling them too complex and costly for not enough return.

Calpers in 2014 was set to commit 250 million euros ($334 million, at the time) in a separately managed account with CVC Capital Partners, and in 2012 it pledged $500 million to a managed account overseen by Blackstone Group LP.

Calpers has said base fees to external money managers, which are tied to the amount invested, were $798 million in the 2014 fiscal year, down 12 percent from 2009. The pension plan reduced the number of firms it hired, sought better terms from those it kept, and put its staff in charge of more investments. In all, the fund paid $1.6 billion last year.

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