CalPERS Gives $500 Million to New Private Equity Fund of Funds

GCM Grosvenor will oversee private equity emerging managers.

The California Public Employees’ Retirement System (CalPERS) has committed $500 million to an emerging manager fund of funds run by GCM Grosvenor as part of efforts to increase its private markets emerging manager program.

Retirement system spokeswoman Megan White confirmed the hiring of GCM Grosvenor in an email to CIO, saying the decision was made in November. GCM Grosvenor already runs two other private equity emerging manager fund of funds for CalPERS, overseeing the investments of more than $300 million by several dozen private equity firms.

Under CalPERS rules, the new $500 million commitment was approved by investment staff and bypassed the investment committee.

The new commitments to GCM Grosvenor will bring the amount of capital it oversees in emerging manager private equity fund of funds to approximately $850 million.

California law prohibits woman and minority set-asides, but CalPERS has been active in encouraging a diverse set of managers to apply to manage money for the $345.6 billion pension system. Some members of the California state legislature have also put pressure on the pension system to hire more woman and minority-owned firms. At the same time, CalPERS must keep in mind its fiduciary duty and its duty to generate the best returns possible within acceptable risk standards.

The first GCM Grosvenor emerging manager fund of funds, GCM Grosvenor Dem, with a vintage year of 2012, has an internal rate of return of 8.9% and an investment multiple of 1.2x as of March 31, 2018. The results are in the lower end of the system’s private equity returns, show system statistics.

The second fund, GCM Grosvenor Dem II, has a vintage year of 2014, so it is still in its investment cycle. Results as of March 31 were 7.6% with an investment multiple of 1.1x

The issue of GCM Grosvenor picking a diverse set of managers for its private equity fund of funds came up at a Dec. 10 investment committee meeting.

Sara Corr, CalPERS interim private equity managing investment director, disclosed that approximately one-third of the $300 million in the first two GCM Grosvenor emerging manager funds has gone to firms with investment teams spun off from large private equity firms.

Board member Dana Hollinger, who brought up the issue, noted that if offshoots of industry-leading giant private equity firms “like KKR” were receiving CalPERS contracts, it defeated the intent of the private equity funds of funds.

“In other words, we’re taking the top kind of maybe rich white guys and making them richer,” she said.

Clint Stevenson, investment director of the CalPERS investment manager engagement program, told the investment committee that his program has reached out to a broad segment of managers to increase diversity. He also pointed out that California law does not allow the pension system to have specific  diversity targets.

He did say that CalPERS has broadened rules allowing private equity managers raising their first, second, and now third private equity fund to be considered emerging managers in efforts to cultivate a larger pool of candidates to be eligible for the fund of funds.

The emerging manager funds of funds are part of CalPERS’s $28 billion traditional private equity program, which mostly consists of CalPERS investments as a limited partner with other institutional investors in funds run by general partners.

CalPERS officials are also hoping to launch within the next several months a more direct private equity program. That program would aim to invest $20 billion over the next decade: $10 billion to Horizon, a CalPERS-backed organization that would invest buy-and-hold stakes in established companies, and $10 billion to Innovation, which would invest in late-stage venture capital companies in the technology, life science, and healthcare sectors.

The program is expected to come before the CalPERS investment committee in February or March.

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