CalPERS Scraps Outsourcing Private Equity Program

BlackRock and other investment firms were vying to manage all or part of the largest private equity program in the US.

The California Public Employees’ Retirement System (CalPERS) has ended its consideration of a plan that would have seen a strategic partner play a key role in running its existing $27 billion plus private equity program.

BlackRock, Goldman Sachs Asset Management, Neuberger Berman, AlpInvest Partners, Hamilton Lane, and HarbourVest Partners had all submitted plans to CalPERS early this year detailing the role they would play in managing the largest private equity portfolio in the US.

John Cole, a CalPERS senior investment officer, told the investment committee at its meeting on November 13 that the plan is now off the table.

“A year ago, we thought maybe it would be best to find the large partner in a discretionary role to help us identify good funds and to expand our relationships to include more co-investing and access to secondary transactions,” he said.

Cole said the six investment organizations that applied to help CalPERS were all outstanding. “But we have come to the realization after a lot of analysis and discussion that the structure is unlikely to meaningfully strengthen our organization,” he said.

Cole did not go into detail and CalPERS never specified whether the chosen firm would have run all or part of the private equity program, which is mostly invested in co-mingled funds with general partners.

CalPERS had been in exclusive talks with the world’s largest asset manager, BlackRock, before announcing that it was seeking proposals from a wider set of managers to be a strategic partner in the administration of the private equity program.

Cole did not rule out the firms helping CalPERS in an advisory capacity but said no decision would be made until CalPERS appoints a new private equity director in early 2019.

The pension plan has been without a private equity director since Real Desrochers left in April 2017 to join a private equity firm.

In another major announcement, Cole also disclosed that CalPERS is scaling back a program announced in 2015 by outgoing Chief Investment Officer Ted Eliopoulos to reduce the number of private equity managers from several hundred to 30.

The reduction was designed to allow CalPERS to focus its private equity commitments on top-tier private equity managers with the best returns. It was also supposed to simplify administration and allow CalPERS to get better fees by concentrating commitments in a smaller number of managers.

Cole said at the Nov. 13 meeting that the pension system had reduced the number of general partner relationships from several hundred to currently around 90 with a target of between 40 and 45.. “We think that makes sense in order not to dilute our impact and, as a result, the returns from the entire private equity portfolio,” he said.

CalPERS’s private equity consultant, Meketa Investment Group, questioned the wisdom last year of CalPERS cutting its private equity managers to 30, expressing concerns about missed investment opportunities.

In a November 2018 report, Meketa says that investment staff has sought to expand the list of managers with a continued focus on high-quality general partners. “The expansion of the manager set provides opportunity, not only to increase scale, but also pursue strategies beyond the mega and large buyouts in order to add portfolio diversification,” it said.

More than 60% of the CalPERS private equity portfolio is in buyout funds.

The private equity asset class is CalPERS’s largest-producing asset group in both the short- and long-term. The $361.1 billion pension plan is only 71% funded.

The private equity asset class provided CalPERS with a 16.1% net return in the fiscal year ending June 30, 9% over the 10-year period, and 10.5% over the 20-year period, shows CalPERS data.

CalPERS is also pursuing an expansion of its private equity program, pending board approval, creating its own $20 billion direct investment program that would invest in later-stage companies in the venture cycle and take buy and hold stakes in established companies.

The expansion would be managed by a separate organization, funded by CalPERS, that would have the power to make investments without the approval of the CalPERS board.

Cole did not give any indication when the CalPERS Investment Committee, made up of board members, would consider the plan. CalPERS officials had said they hoped to start the program by early next year.

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