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California pension intends to reduce private-equity managers

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(Bloomberg) — The California Public Employees’ Retirement System, the biggest U.S. public pension, is trying to reduce the number of private-equity managers it hires and teaming up with other institutional investors to negotiate better terms.

Chief Investment Officer Ted Eliopoulos told the Financial Times in a story published today that the $292 billion pension could cut the number of managers it hires by two-thirds. Private-equity firms use borrowed money to buy companies, improve profits and resell them.

Brad Pacheco, a Calpers spokesman, said in an e-mail that the pension plans to reduce the number of managers as part of a broader restructuring. “Part of the reason is costs, among other things, like simplifying the portfolio,” he said.

The private-equity decision followed others meant to set the pension on a more stable course. Calpers in September announced plans to divest the entire $4 billion that it invested with hedge funds, saying they’re too expensive and complex. Calpers has been working to reduce risk in its portfolio after the global financial crisis wiped out more than a third of its wealth, forcing it to increase contributions from taxpayers to cover losses.

Calpers invests $31.2 billion, or about 10 percent of its portfolio, in private equity. Former Chief Investment Officer Joe Dear first began seeking concessions after the Institutional Limited Partners Association, a group representing private-equity institutional investors, in 2009 began pushing rules seeking to give clients more rights while reducing manager fees. Dear died last year.

Calpers earned 18.4 percent in the fiscal year that ended June 30 as global stock indexes rose to records. At the time, the system said private-equity investments gained 20 percent. Calpers’ 10-year return on private equity of 13.3 percent as of June 30 fell short of its own benchmark by 2.1 percentage points, according to the pension system’s data. The performance also missed in one-, three- and five-year periods.