Largest US pension fund Calpers talking to BlackRock about managing private equity business

The BlackRock logo outside its offices in New York City, US on Oct 17, 2016.
The BlackRock logo outside its offices in New York City, US on Oct 17, 2016.PHOTO: REUTERS

NEW YORK (BLOOMBERG) - The largest US pension fund is talking to BlackRock about outsourcing its private equity business as it seeks to control fees and offset anemic returns, people familiar with the matter said.

The California Public Employees' Retirement System is in discussions with BlackRock about managing some or all of its US$26.2 billion (S$35.12 billion) in private equity investments, said the people, who asked not to be identified because the conversations were private. The discussions are preliminary, they said.

Calpers spokesman John Osborn and Brian Beades, a spokesman for BlackRock, declined to comment.

The mandate would be a big win for BlackRock, which is best known for offering lower-fee passive products, such as iShares exchange-traded funds. The world's largest money manager, which oversees US$5.7 trillion in assets, has been trying to expand its more lucrative alternatives business to increase fee revenue and meet client demand for investments that aren't closely correlated to the stock and bond markets.

Calpers is reckoning with criticism over its private equity investing and how it discloses and accounts for fees. The pension giant convened a panel of executives, including Carlyle Group's Sandra Horbach and BlackRock's Mark Wiseman, to discuss possible models during a board meeting in July. Calpers leadership raised questions about challenges of bringing direct-investing capabilities in-house, contracting with outside managers or creating an independent entity with appropriate oversight.

Calpers, which manages about US$333 billion on behalf of police officers, firefighters and other current and retired government employees, is trying to improve its investment performance and reduce fees amid low returns across many asset classes. In December, Calpers voted to cut its long-term return target from 7.5 per cent a year to 7 per cent, a move that will require larger contributions from workers and taxpayers.

BlackRock's US$128 billion alternatives business includes private equity, real estate, infrastructure and hedge funds. The firm hired Wiseman last September as chairman of the unit and global head of active equities. He previously led the Canada Pension Plan Investment Board and directed the private equity efforts at Ontario Teachers' Pension Plan Board.

Real Desrochers, the head of Calpers's private equity division, quit in April. The fund hasn't announced plans to replace him.