Big pension funds need to raise their returns. Investing in private equity and hedge funds were two of the most popular means to do this. As hedge funds underperformed the broad markets in recent years, they fell out of favor with pension pools. Private equity firms have retained their appeal, but Calpers said this week it will attempt to make its own direct investments in private companies, bypassing the Blackstones of the world, Chief Executive Officer Marcie Frost said in an interview with Bloomberg this week.

One new strategy will focus on long-term ownership of income-producing companies, not unlike Warren Buffett’s buy-and-hold style. The other will seek out late-stage technology startups, similar to a venture capital fund. Calpers plans to more than double its annual spending on private investments, convinced public markets alone won’t meet its 7 percent return target and established private equity firms can’t fulfill all its needs.

“Putting that kind of money to work to keep our [private equity] allocation at 8 to 10 percent of the portfolio through traditional models is not possible,” … Frost said …. “So we have to look at the way we’re investing in private equity.” …

“We know we will need to build a portfolio of scale — a $40, $50, $60 billion private equity portfolio,” {Chief Investment Officer Ted}Eliopoulos said. “We don’t think we can invest at the scale we need to in the traditional offerings of private equity general partnerships. We need a number of tools in our kit.”

On factor in the proposed change is the fees and that PE firms charge on traditional funds, Frost said.