CalSTRS eyes changes to its liquidity management with a focus on private funds

The system’s investment staff may expand target ranges, among other tweaks, as its cashflow needs change.

California’s massive teachers’ pension is in the early stages of overhauling its liquidity management program as it balances a highly illiquid portfolio against a growing need for cash to pay beneficiaries.

Many allocators face liquidity problems due to decreased distributions caused by a sluggish exit market. However, California State Teachers’ Retirement System has indicated it sees a long-term liquidity problem brewing due to its escalating annual cashflow needs paired with a total fund with nearly 40 percent in illiquid asset classes.

CalSTRS will address its liquidity management issues at its investment committee meeting scheduled for September 13. Affiliate title Buyouts reviewed documents detailing the system’s liquidity management program made available before the meeting.

According to a note from investment staff, CalSTRS’s annual cashflow needs are expected to balloon to $18 billion annually over the next 25 years, up from the current annual total of $4 billion in annual payments due beneficiaries.

At the same time, CalSTRS faces multiple problems impacting its cashflow. According to the note, the $315.6 billion system has a negative cashflow as its payments to beneficiaries exceed contributions from members, employers and the state government.

The second problem pertains to the development of the system’s private market investments, which as of the end of July totals nearly 40 percent of the total fund, according to CalSTRS.

Currently, the system allocates roughly 15 percent to private equity, 16 percent to real estate and 7.5 percent to asset classes with exposure to private infrastructure and other opportunities, board documents show.

“Investors in these strategies tend to have limited control over the timing of the underlying investment purchases and sales, particularly in commingled funds. This increases the need to forecast and plan for private market capital calls and distributions, which impact cash needs,” said a note from investment staff.

CalSTRS investment staff will focus on several areas to better navigate its liquidity needs, according to the investment team’s note.

The investment team will provide a more detailed annual asset allocation and private market pacing plan to better manage its liquidity needs, according to the staff note.

And the system’s investment staff also seeks to establish annual commitment and cash management budgets for its private markets portfolio that it will track on a quarterly basis.

The system currently only conducts forecasts of daily cash on hand and its highly liquid portfolio and periodic reviews by investment team directors and senior management, the note said.

“This will allow senior management to review investment opportunities, consider market outlook, and plan near-term asset allocation goals,” the note said.

Investment staff is also proposing the board approve widening the range around policy targets of certain asset classes in order to increase staff’s flexibility in rebalancing the portfolio, according to the note.

A discussion with more specifics about the allocation ranges will be a topic at November’s investment committee meeting, according to the note.

CalSTRS, which has about $321 billion in assets under management, has committed about $2.3 billion to 16 private equity funds this year, according to Venture Capital Journal research. Most of that amount (nearly $1.7 million) went to 10 buyout funds. The pension system has made just two commitments to VC funds: $100 million to Institutional Venture Partners XVIII and $50 million to Tiger Global Private Investment Partners XVI.

Additional reporting by Lawrence Aragon