America’s largest pension fund is halfway through culling its manager roster from roughly 300 down to 100, but the overhaul may actually benefit its emerging managers.
Or, rather, its high-performing small managers.
“Our goal is to have fewer, more strategic relationships with external managers,” Ted Eliopoulos—CIO of the California Public Employees’ Retirement System (CalPERS)—told the fund’s investment committee during a meeting Monday.
“The strategic portfolio restructuring includes our ongoing commitment to emerging managers,” he continued. To this end, the fund is creating “a new opportunity for successful emerging managers to compete for new capital commitments and transition to larger direct relationships in CalPERS’ portfolio.”
Firms in its existing incubator program often outgrow the “emerging manager” label before amassing sufficient size to qualify for regular mandates, according to investment staff. Portfolio Manager Laurie Weir called this “a kind of a limbo,” which CalPERS aims to solve in its ongoing restructure.
“The new manager transition program will provide the opportunity to invest in follow-on funds with incrementally larger commitment amounts,” Weir said. This would give CalPERS staff “significant additional time to test and improve the skills and capacity of investment manager firms.”
Private equity, real estate, and global equity divisions can source transition candidates from both inside and outside of CalPERS’ emerging manager program, Weir said. These middle-sized firms will be evaluated first via track record, then on strategy, value creation, management team and talent, asset allocation, portfolio fit, and finally alignment of interest with the pension fund.
“Managers will have to constantly compete to meet or exceed expectations in order to remain in the manager transition program,” Weir noted.
She estimated that CalPERS will commit up to $7 billion to approximately 15 transitioning managers over the next five years.
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