The largest U.S. 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 New York-based BlackRock about managing some or all of its $26.2 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.

BlackRock forecasts a 39% increase in the more than $750 billion market for bond ETFs.
BlackRock’s $128 billion alternatives business includes private equity, real estate, infrastructure and hedge funds. Bloomberg News

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

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.

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Calpers, which manages about $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% a year to 7%, a move that will require larger contributions from workers and taxpayers.

The mandate would be a big win for BlackRock, which is best known for offering lower-fee passive products, such as iShares ETFs. The world’s largest money manager, which oversees $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.

BlackRock’s $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.

Bloomberg News