CalPERS Approves New Private Equity Investment Organizations

The pension system would invest up to $20 billion in direct  style private equity  investments, but it’s unclear when the plan could start.

The investment committee of the California Public Employees’ Retirement System (CalPERS) approved a plan Monday to create two new private equity organizations that could invest up to $20 billion. However, the actual implementation of the two investment organizations, called Innovation and Horizon, could still be months away, or even longer.

The plan approved by the investment committee on Monday gives CalPERS investment officials the power to negotiate contracts with investment teams for the new organizations.

The private equity plan would then come back to the 13-member investment committee for final approval. An outside investment consultant would also give the investment committee its prudent-person opinion before the vote.

CalPERS Chief Investment Officer Ben Meng has not given a timetable as to when the new investment organizations could start. He has said it won’t start unless CalPERS is able to negotiate acceptable contracts with top-notch investment teams.

CalPERS has the largest private equity commitments of any pension plan in the US at $28 billion. At the same time, it has been unable to grow its program—the pension system’s best-producing asset class investment-wise—because of competition from other institutional investors to participate in funds run by top managers.

Innovation and Horizon are seen as a way around that. Innovation would make direct-style investments in late-stage companies in the venture capital cycle. Horizon would take buy-and-hold stakes in established companies, similar to what Warren Buffett does with Berkshire Hathaway.

Monday’s vote was unanimous by the  investment committee, who also serve as board members.

The direct-style investment plan is not without controversy, as critics have questioned the proposed structure of Innovation and Horizon. The organizations would be funded by CalPERS, but they would not be owned by the pension system. Instead they would be run by general partners and their investment teams.

CalPERS officials maintain that the structure is the best way to launch the new investment organizations as quickly as possible. The CalPERS plan differs from what Canadian pension plans do, often making private equity investments directly without general partners.

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