The nation’s largest public pension system currently has around 7% exposure to venture capital within its $49 billion alternative investment management (AIM) program, but last week approved a new target allocation of just 1%. A CalPERS spokesman tells me that the venture industry “is too small to absorb a larger percentage of money from an investor the size of CalPERS.”

I’ve heard this argument before: CalPERS can’t really commit less than $50 million to a fund, and what diversity-conscious VC firm wants a single LP to represent a 20-35% position in one of its funds? But this also seems to ignore that many of the hottest venture funds are now raising much more money than are their more “average” peers.

For example, Andreessen Horowitz reportedly is raising around $900 million. Bessemer Venture Partners raised a $1.6 billion fund earlier this year while Greylock Partners raised $1 billion. Sequoia Capital, Accel Partners and Kleiner Perkins each have raised over $1 billion over the past 12 months for multiple strategies, and New Enterprise Associates is expected to seek another $2 billion-plus in 2012.

So that leaves three options:

1. 1. CalPERS is ignoring the aforementioned funds (because it mentally wrote off VC years ago due to poor post-bubble returns),
2. 2. Many of the aforementioned funds don’t want the public scrutiny/disclosures that come with public pension commitments, or
3. 3. CalPERS believes the best opportunities will be in smaller VC funds, thus validating the size argument.

I tend to go with the first explanation, since the second one is only valid in select circumstances and the third would run counter to CalPERS’ strategy on its commitments to buyout funds (where performance data also favors smaller fund sizes).

But the system still isn’t letting its new private equity investment chief Real Desrochers talk to the press, so it’s really just a guessing game. That also goes for how CalPERS will get down from 7% exposure to its 1% target. Probably some combination of time attrition, secondary sales and avoiding new commitments….

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