CalPERS Confidence or CalPERS CYA?

The California Public Employees’ Retirement System (CalPERS) yesterday made headlines for proposing an increase to its private equity allocation from 10% to 14 percent. A vote is scheduled for the pension fund’s board meeting next week.

At first glance, the move seems to be a giant vote of confidence in private equity (venture, buyouts, etc.). But that gets tempered when one realizes that CalPERS is already at 13% exposure to the asset class, which makes the proposal look more like reactionary CYA prompted by the denominator effect.

So which is it? According to sources close to the pension fund, it’s both. The allocation increase’s immediate affect would be to address the current exposure realities, but there also is a desire to “juice returns during the upcoming recovery.”

An improving economy would lift most asset classes (thus diminishing the denominator effect), so the added private equity exposure reflects CalPERS’ view that PE would outperform many other types of investments.