We recently conducted an analysis of CalPERS’ private equity portfolio since 2000 using peer benchmarking analysis and PME analysis. As the largest private equity investor in the US, CalPERS is often viewed as an influential LP in the private equity community. While they are good at picking managers from its peer universe, PME analysis showed CalPERS to be insufficient at selecting managers that deliver alpha.
To be sure, private equity has been their best performing asset class in their portfolio over the long term but it has been underperforming CalPERS’ benchmarks over the 1, 3, 5, and 10-year horizons. Looking at investments made since 2000, CalPERS has committed 63% of their capital to above average managers. However, PME analysis showed that 57% of their capital is committed to funds that underperformed the Russell 2000.
- Link between 1st quartile funds and PME outperformance – 75% of first quartile funds outperformed the market.
- PME analysis shows peer analysis not comprehensive enough – 42% of funds that outperformed market were not in first quartile of peer universe.
- Buyout funds performed best against the markets – 53% of their capital committed to buyout funds outperforming the market.
- Fund of Fund performed the worst against the markets – 17% of the capital committed to fund of funds outperformed the market.
PME analysis has existed for close to 20 years but it’s use in fund analysis has really been perfunctory until recently. Most analysis is focused on peer universe analysis but PME analysis is increasingly being seen as a necessary and additive analysis that should be a part of the due diligence process. Bison believes this analysis could have aided CalPERS in their manager selection and investment style allocation.Read More