00:00Marcy, great to have you with us. Thanks so much for joining us. How is your reaction to the recent
00:07turmoil, more around private credit, but around private assets in general?
00:13I just interestingly enough, I'm here at an event with both my head of private equity and the chief investment
00:20officer.
00:21And we're having this conversation yesterday. And, you know, on the private credit side, we've been very specialized and working
00:27only with, you know, high quality managers.
00:29We had an 8% allocation to private credit, and I think we're hovering around 4%.
00:34And we believe that that book is diversified enough that, you know, the team is really not too concerned about
00:40the software exposure that we're hearing a lot about.
00:43On the private equity side, I know that was part of your intro.
00:46We're really proud of the private equity book and the reworking, excuse me, of that book over the last two
00:52and a half to three years.
00:53We did post a 14.3% private equity return last fiscal year.
00:59On the private debt side or the private credit side, we did post a 12.8% return last year.
01:04So we still have a lot of conviction in our private markets allocation and don't really see a need to
01:11change.
01:11But as always, we're very thoughtful and considerate around the managers we're working with, making sure we have good values
01:17alignment, but also making sure that the portfolio stays very diversified as we look through, you know, all these different
01:24market cycles that seem to be approaching us.
01:26And you said your current allocation works for the next four to six years.
01:29What gives you confidence in that time horizon and what risks are you looking at?
01:34Yeah, so on the private equity side, we're in a very strong liquidity position.
01:40And I know that that is not the, you know, the same case that many of our public pension peers
01:45find themselves in.
01:47I know that there are public plans out there actually reducing their allocation to private equity and private markets generally.
01:53So we believe that the recalibration of the book that we did about three years ago, how we do manager
02:02selection, the reduction of fees, we've reduced fees by about 100 bps in the portfolio over the last three years,
02:08which is phenomenal.
02:09It's just a great, you know, some great recognition for the team.
02:13So manager selection, reduction of fees, including more co-investments, and as well as emerging managers.
02:21We still have very, very strong pipeline around emerging managers.
02:26We're targeting about 10% of the portfolio there.
02:29We went back into venture capital.
02:32There was a time that CalPERS stepped away from venture cap, and the team has found a way to reenter.
02:39And, again, about 10%, maybe up to 15% of the portfolio really focused on emerging managers as well as
02:46venture.
02:46So we have a lot of conviction because we've seen how this new recipe has worked for the team and
02:52for CalPERS over the last three years.
02:53And we don't see that effectively changing over the next four to six, including the liquidity position of the portfolio.
03:02Marcy, there are, you know, even if private credit firms had done great due diligence and made really good loans
03:09because of investor fears,
03:11there are some looking to unload those assets.
03:14Have you been approached by private credit operators who want to sell you some of their loans?
03:21Not aware, personally, that we have been approached.
03:24You know, we certainly have done some secondary sales on the private equity side of the house,
03:29but I'm not aware that we've received, you know, incoming calls around selling off of private credit books from, you
03:35know, from our peers.
03:35Would you be a buyer?
03:36I mean, are those conversations that CalPERS would have and, you know, look at some of these assets and say,
03:42you know what, we think it's a good risk, a good credit, and we'll take it?
03:46You know, if the team, you know, we'll always take a phone call.
03:49But if the team felt that it diversified the portfolio in some way, you know, the terms are in a
03:55way that, you know,
03:56because we do have a little bit of, you know, runway on the allocation.
04:00But I think, again, we sit around 4%.
04:01We can go up to 8% of the book.
04:03But I think the team would be open to taking the call.
04:06We have a new head.
04:07We call them Managing Investment Directors.
04:09Masha came in and is looking at how to really expand the strategy that we have in private debt and
04:15private credit.
04:16We've really done more in direct lending, some in specialty lending.
04:19But really, you know, expanding that strategy I think will be, you know, just a real piece of, you know,
04:25her time here at CalPERS.
04:26But, yes, we would always take the call.
04:28And if we felt the terms were right and it diversified the portfolio in some way, you know, certainly we
04:34would take a look at it.
04:35What about energy and renewables?
04:36Where are you currently seeing the most compelling opportunities there?
04:40And how do those fit in your broader risk-reward objective when it comes to your portfolio?
04:45Yes.
04:46As you recall, we did a commitment as part of our sustainable investments to do $100 billion by 2030.
04:54And half of that is really the exposure that we already have with listed companies, about 53% of that
04:59$100 billion,
05:00which leaves the rest around energy transition or what we call climate solutions.
05:07So whether those are mitigation or whether those are adaptation or whether those are real, truly new innovation around climate,
05:14whether that's methane capture.
05:16So we're on track.
05:18My team has absolute confidence that they'll be able to find the right deals by 2030 to get that $100
05:23billion working for us.
05:25But we're finding a lot in venture.
05:27Those tend to be, again, you know, smaller checks for us.
05:31But as you come in early to venture, we're hoping, you know, we stay with that company as they continue
05:36to build and go through their various series.
05:38But, you know, we're finding that public companies are doing a lot around transition.
05:43And we want to reward the companies that we think are moving in the right direction.
05:47And, you know, so we do get some criticism now and then because we do have some oil and gas
05:52exposure in our calculation
05:53because we do think that some of the oil and gas companies are investing appropriately around reduction in greenhouse gas
05:59emissions
06:00or investing in methane capture or investing in just how do we continue to support the energy transition
06:07when we know that there's a huge energy drain coming from just from AI and the capacity that's needed to
06:13run those data centers.
06:15Speaking of AI, I wonder about your take on software.
06:19Marcy, obviously, the last, as we played that thought from Bruce Richards, the last few days and weeks,
06:26there has been real concern whether or not you believe AI is going to eat software's lunch.
06:32Do you find discounts there that make you want to buy?
06:37You know, I think the team is always, you know, looking at, especially on the private market side,
06:42looking for where those innovative plays might be.
06:45But, you know, as far as AI for CalPERS, we look at it in a couple of ways.
06:49One, you know, internally, operationally, how can we use AI to become, you know, more efficient, more productive?
06:55You know, those operational efficiencies are extremely important, as well as the insights that we think that this vast amount
07:01of data
07:02that we have at CalPERS, how do we access that more quickly, make better, more informed investment decisions?
07:08So, operationally, the team has been using that.
07:10And I would say, in particular, on the sustainable investment side of the portfolio,
07:15a lot of work happening there as we're discovering, you know, good climate solutions and good investments for the fund.
07:21But I think, you know, AI, from an investment standpoint, we're doing a lot of engagement with public company CEOs
07:27on how they're approaching it with their company.
07:29How do they see monetizing this better in some way over their next two- to five-year business planning
07:35cycle?
07:36And those engagements are going well.
07:38You know, obviously not something I can talk too publicly about, but our corporate engagement team has been quite active
07:43and trying to understand where, you know, these listed companies are, you know, maneuvering
07:48and how they're developing out their plans to, you know, take full advantage of what AI will eventually bring.
07:54But I would say there's two sides of it, or three sides.
07:56So, operational efficiencies, productivity, and insight.
07:59How do we invest the portfolio through our public companies?
08:03And then, finally, where's the innovation and the private market side that we can get in early?
08:06I mean, on the operational side, you know, as CEO, are you finding you have big bills from software-as
08:13-a-service companies
08:14that you can cancel by doing it yourself with AI?
08:20We haven't gotten there yet.
08:23But, interestingly enough, we are in progress of implementing some new data and technology initiatives.
08:30And those are very tough questions that we're asking those software partners today.
08:34Okay, those costs are coming in very high.
08:36How are they taking advantage of AI and its benefits?
08:39And what does that mean to cost reduction for CalPERS?
08:42So, these are conversations happening today.
08:45And I would expect to see reductions in just our operational costs around software.
Comments