The nation's largest public pension fund would have endured lower returns and higher volatility over the years had it not invested in private equity, even with its high fees and added risks, experts testified Monday.
At a daylong workshop before the investment committee of the California Public Employees' Retirement System, officials and outside experts described an investment landscape in which the private equity industry still retains the upper hand over investors desperate for the sector's higher-than-average returns.
"There is an enormous amount of demand for what we call the better performing manager," said Réal Desrochers, a director of CalPERS' $28-billion private equity program. "There is intense competition to get" into the top performing funds.
The informational workshop comes during a time of heightened public scrutiny of private equity, the often risky business of buying and selling whole companies through leveraged buyouts, venture capital investments and other direct investments.
Though CalPERS has acknowledged the sector's problems, including high fees and murky disclosure, its record of generating higher returns over time than it does in public stocks has made it an indispensable part of the portfolio, officials said.
Eric Baggesen, a CalPERS investment executive, said a hypothetical scenario that eliminated private equity from the 2013 portfolio would have required the fund either to increase volatility substantially or reduce the expected return by 0.25%.
Experts said a particular problem with the sector is that stellar returns are only generated by the top firms, while the rest don't necessarily justify the risk and the expense.
Josh Lerner, a Harvard Business School professor, said that while the disparity between top and bottom firms has been shrinking over the years, it still serves to stoke competition among institutions for access to the best funds.
"If you got the right managers, you tend to do really well," he said.