CaliSTRSnication

A week ago ZH attempted to present the behind the scenes gimmicks at CalPERS, which, with its $53 billion in PE committed capital, I claimed, is a critical pillar of support for the private equity community. To our readers at Bloomberg and elsewhere, I follow up by providing the detailed private equity portfolio at CalPERS sister fund: CalSTRS, or the California State Teachers' Retirement System. CalSTRS is the nation's second largest public pension fund, holding over $113.7 billion at February 28, 2009. Seeing how some of the major names in the $37 billion PE portfolio are the who's who of private equity firms getting majorly washed on the 2005-2007 LBO wave, it is no wonder that CalSTRS is using the same generic J-curve excuse and "long-term" IRR calculations to avoid the interim fluctuations that CalPERS uses.

IRR Over Time

The actual IRR performance of any limited partnership is not known until the final liquidation of the partnership, typically over 10 to 12 years. Until the liquidation takes place, the IRR is only an interim estimated return.

The IRR calculated for a partnership in the first three years of its life are relatively meaningless given the "J-curve effect." The J-curve phenomenon is the effect of the cash-flow behavior of a partnership. It can be summarized as the first year's investment expenses of investing in a fund that has yet to harvest its capital gains in the future. This normally translates into a negative IRR in the early years of the fund. The plot of the partnership values over time generally resembles a letter J.

Unfortunately, no excuse will make up for a default wave in the PE investment portfolio as much as CalSTRS may desire the opposite, because once equity becomes worthless, it stays worthless. As such, the "plot of the partnership value over time" will generally resemble the letter L.

I present the full CalSTRS PE portfolio below for our readers' enjoyment. Notable top five investments by capital committed:

Texas Pacific Group: $3.1 billion
Blackstone: $2.9b billion
CVC Capital Partners: $1.9 billion
Welsh Carson: $1.8 billion
Permira: $1.7 billion

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