The California Public Employees’ Retirement System (CalPERS) saw an overall 11.6% increase in investments in its home state in the 2017-2018 fiscal year, shows a new report. However, a CalPERS California-oriented private equity program is winding down after 18 years and assets are down by more than 50% in the most recent one-year period for which there is data.
Overall, the $33.5 billion invested by the pension system in California investments represented 9.2% of the pension system’s $352 billion portfolio, as of June 30, 2018, shows the report, “CalPERS for California.”
While the actual percentage of California investments was up 11.6% from the prior 2016-2017 fiscal year, the actual overall percentage of in-state investments relative to the total portfolio held steady at 9.5%. That’s because the total CalPERS portfolio grew to more than $350 billion from $323 billion over the last two years.
The data lags one year, so statistics for the 2018-2019 fiscal year won’t be available until next summer.
Programs aimed at targeting in-state investments by public pension plans can be controversial, because they can raise questions over whether those investments are actually in the best companies and properties or are being chosen simply to satisfy politicians and business interests in the pension plan’s home state.
CalPERS intentionally choose managers for the private equity program who promised to invest in underserved areas of California. It didn’t work. The financial results were a major disappointment, and negative returns were common for the managers selected for the program, which began in 2001, show CalPERS statistics.
For other asset classes, like stocks and bonds, the increases in in-state investments were not intentional.
For example, in equities, CalPERS saw the value of companies it holds like Apple, Facebook, and Google’s parent company, Alphabet, increase in value in recent years as the value of the stock went up.
“As the world’s fifth-largest economy, California offers a wide array of attractive investment opportunities for all investors,” the report said. “Investment in California by our staff and external managers and advisors reflects the strength and diversity of California’s economy and the quality of its companies, properties, and other investment opportunities.”
Investment staff noted in the report that the capital invested in California is usually not explicitly directed to the state “but is the consequence of the typical institutional investment process weighing the financial merits of companies, properties, and projects, regardless of location.”
The reverse was true for the in-state private equity program that began almost two decades ago. The program’s assets were down to $1 billion as of Sept. 30, 2018, 54.5% less than a year earlier, the latest report shows.
CalPERS launched the program 18 years ago in the face of pressure from state lawmakers and emerging private equity firms, sometimes minority-owned. The idea was to have private equity dollars flowing into traditionally underserved markets with the private equity firms getting a piece of the action.
“The initiative sought to discover and invest in opportunities that may have been bypassed or not reviewed by other sources of investment capital,” said a CalPERS report last year.
Former CalPERS Chief Investment Officer Ted Eliopoulos said back in June 2018 that the private equity initiative created thousands of jobs in California. The problem was that the jobs were supposed to be a side benefit, while CalPERS’s fiduciary duty was to grow its investment returns, he said.
Last year, Eliopoulos disclosed many of the four dozen firms that had participated in the PE program had investments returns that were in the negative, losing on average 5% of the money they handled for CalPERS.
Eliopoulos said the program was ending because it was too risky for CalPERS. In contrast, CalPERS investment data shows that the overall $26 billion-plus private equity program has been the pension plan’s best-producing long-term asset class. Investment returns have exceeded 10% on average over the last 20 years.
CalPERS has also been winding down another California private equity program aimed at California and funding companies investing in clean air and technology. The $465 million Clean Air and Technology Fund dates back to 2007. So do the negative returns. The fund has had a negative internal rate of return of -12.2%, as of Sept. 30, 2018, CalPERS data shows.
Former CIO Joseph Dear, who is now deceased, said back in 2013 that fund was a “noble way to lose money.” He conceded that CalPERS might have been too early in investing in some green ventures, like those in the fund.
And yet another California initiative is also being scaled back: A California mezzanine debt fund started in 2014. CalPERS committed an initial $80 million to buy the mezzanine debt of California companies. The debt is considered among the riskiest form of debt financing but can pay returns up to 20%.
For CalPERS, the returns never lived up to their promise. The fund had a -2.1% internal rate of return, as of Sept. 30, 2018, shows pension plan data. CalPERS officials had high hopes for the fund, which is managed by Grosvenor Capital Management.
“It’s great to have a hand in stimulating job creation and economic growth in our home state as we seek the best risk-adjusted returns for the portfolio,” Eliopoulos said in a press release in November 2014 announcing the start of the fund.
CalPERS officials have refused to discuss with CIO why the fund has had poor performance, but at an investment meeting a year ago, Clinton Stevenson, a CalPERS investment director, said the program was not scalable.
The money devoted to the CalPERS California private equity portfolio as of June 30, 2018, was only 3.7% of the total CalPERS private equity portfolio. CalPERS officials have not given an estimate of how long it takes to wrap up the program. Many of the private equity funds are past their seven- to 10-year normal investment cycle.