Private equity’s largest U.S. investor is changing up its strategy by Dan Primack @FortuneMagazine January 20, 2015, 4:17 PM EST E-mail Tweet Facebook Google Plus Linkedin Share icons When the California Public Employees’ Retirement System (CalPERS) announced last fall that it was abandoning hedge funds, I publicly wondered if private equity would be the next asset class to fall. After all, it featured many of the same complexities and high fees that CalPERS cited in its hedge fund critique. At the time, however, a system spokesman said my curiosity was unfounded, as the hedge fund decision was driven largely by an inability to scale – whereas CalPERS had no trouble finding enough private equity opportunities to meet its target allocation. Today, however, The Financial Times reports that CalPERS may cut its number of private equity relationships by up to two-thirds. My kneejerk reaction was to think that CalPERS had changed its mind (or that it wasn’t entirely truthful in the first place). But the reality is that the FT story leaves many unanswered questions. For example, will there be a corresponding target allocation cut? CalPERS previously reduced its PE target from 14% to 10%, but that was largely to better reflect current exposure (particularly in light of rocketing public equity holdings). Or is this really more about consolidation than cutting investments? Not only because bigger checks often come with lower fees, but also because fewer relationships require less investment staff/consultants to oversee. And, if that is the case, what is the impact on return expectations, given historical data that shows smaller and mid-cap PE funds often outperform larger ones. The FT also suggests that CalPERS plans to “team up with other institutional investors to negotiate better terms.” Nothing new about that, as CalPERS has been pushing hard on terms ever since Real Desrochers took over the PE program in 2011 (which has had its own culling effect on existing manager relationships). Moreover, it’s worth noting that Desrochers had constructed a much more concentrated portfolio in his prior role leading private equity for the California State Teachers’ Retirement System (CalSTRS) than the one he inherited at CalPERS. In other words, this may be more about a longstanding portfolio strategy than a reaction to current market conditions. CalPERS is always a bit of an odd bird, in that it is by far the largest public pension system and yet, at the same time, one that wants to serve as exemplar to all of its smaller peers (despite the fact that size differences can, and often should, result in different investment strategies). But, at the very least, CalPERS can give PR coverage to other public pensions that want to make difficult decisions, as we saw a bit in the hedge fund example. As of last check, around one-quarter of all PE commitments come from U.S. public pension funds. Even a slight pullback could become very problematic for the industry — particularly as many firms already have acquiesced to LP demands on fee splits (i.e., they don’t have many more marketing levers to pull). CalPERS was a big part of the private equity industry’s growth in the 1990s and the aughts. Perhaps it soon will play a very different role. At the very least, it would seem that smaller funds may have to look beyond the 800 lb gorilla. Sign up for Term Sheet, Dan’s daily newsletter on private equity and venture capital.