CalPERS Investment Committee members have expressed concern that underserved communities will no longer receive an economic stimulus from the pension fund with the ending of the California Initative, a 17-year effort to infuse private equity funds into underserved areas.
“There’s just an unending appetite, as you know…with respect to wanting capital to be deployed in different parts of the state, and unfortunately, a shortage of it,” said Betty Yee, the state comptroller who serves on the CalPERS board, at a June 18 meeting.
Other investment Committee members expressed similar thoughts questioning how CalPERS could still focus on investments in underserved areas, despite the fact that investment returns for the $1 billion plus program never met expectations.
CalPERS Chief Investment Officer Ted Eliopoulos said at the June 18 meeting that CalPERS investment staff is still open to private equity investments in underserved areas, but investments will be looked at on an overall basis in terms of the private equity program, not specifically targeted efforts at those areas.
CalPERS is currently looking for a fund of funds manager to launch a new private equity initative that would pick emerging managers who are considered newer private equity managers or women and minority-owned firms, but there is a key difference between the planned program and the California Initative. The managers will not be given a mandate to invest in underserved area, but to find the best possible investment opportunities anywhere in the world.
Eliopoulos said it’s unclear as to whether the selection of more diverse private equity firms will lead to investments in portfolio companies in underserved areas.
Public pension system investments in a retirement system’s home state can be a touchy issue and many state pension plans have in-state investment programs in place partly because of political pressure. California legislators have pushed the system in the past to make investments in underserved areas and to hire more minority and women managers.
CalPERS officials maintain overall that their investments affect the state in a major way. A separate CalPERS report on California investments, also released at the June meeting, shows that 9% of the system’s more than $350 billion in assets under management is invested in California. But those investments are heavily concentrated in the San Francisco and Los Angeles areas, the report shows.
The assets invested in California is not because of a self-directed effort by CalPERS investment staff; it is a by-product of the more than $350 billion invested by CalPERS. For example, California is home to some of the world’s largest public companies, such as Apple, Google, and Facebook, in which CalPERS invests through its equity index funds.
The ending of the California Initiative comes as Eliopoulos is attempting a restructuring of CalPERS’s $27 billion private equity program. Proposed changes include the launching of an independent investment organization that would make billions of dollars of direct investments in later-stage venture capital companies as well as in established companies in a buy-and-hold strategy.
CalPERS board member David Miller said at the June 18 meeting that he hopes CalPERS investment staff could explore how the new investment program could incorporate investing in underserved areas of California.
Eliopoulos said that will be explored, particularly through co-investments, in which CalPERS makes a separate investment in a portfolio company outside of the investment it has made with other investors as limited partners in private equity fund.
The new investment program still must be approved by the CalPERS board, which
Eliopoulos hopes the retirement system board will do by the end of the year. However, CalPERS will still keep its traditional private equity program, in which it invests with private equity firms in co-mingled funds, even with the launch of the independent private equity investment organization.