Monday, September 24, 2018

CalPERS Names New CIO?

Dawn Lim and Heather Gillers of the Wall Street Journal reports, Biggest U.S. Public Pension Looks to China for New Investment Chief:
An official with China’s foreign-exchange regulator is the lead candidate to become next investment chief of the largest U.S. public pension fund, according to people familiar with the matter.

The California Public Employees’ Retirement System has offered the job to Ben Meng, deputy CIO of China’s State Administration of Foreign Exchange, one of these people said. The agency is in charge of China’s more than $3 trillion in foreign reserves. Mr. Meng previously worked for the California pension fund earlier this decade.

Mr. Meng hadn’t signed an offer letter as of Wednesday morning, this person said. Mr. Meng contacted The Journal late Wednesday to say he is a U.S. citizen working at the Chinese agency as a foreign contractor. He said he had no comment on the hiring process.

The selection of Mr. Meng would place a familiar face in charge of $360 billion in assets managed for police officers, firefighters and other public workers across the state of California. Mr. Meng spent seven years at the system, known by its abbreviation Calpers, in investment roles. He left in late 2015 and joined the Chinese government agency.

The next investment chief of Calpers faces questions on the future mix, cost and complexity of the pension fund’s portfolio.

The current chief, Ted Eliopoulos, attempted a retreat from more expensive investments as the giant retirement system reduced return expectations, cut costs and tried to better protect the pension fund from the next economic downturn. Mr. Eliopoulos said in May that he would leave his post by the end of the year.

Calpers’s next investment chief would join a fund that is debating the direction of its roughly $27 billion private-equity program. Calpers, as part of a review of that portfolio, is exploring plans to farm out billions to pools that will take stakes in private companies.

Any moves made by Calpers, which is responsible for benefits to more than 1.9 million active or retired public employees, will be watched closely in the pension world. The system is considered a bellwether for investment trends. Calpers and many other public retirement systems around the country are struggling to meet their return targets as they try to fill sizable funding gaps.

Calpers earned 8.6% in fiscal 2018 but has underperformed median returns for peers tracked by Wilshire Trust Universe Comparison Service in the five, 10 and 20 years ended June 30. Its returns have exceeded the system’s 7% target rate during the past five years but not the past 10 and 20. It has just 71% assets on hand to pay for all future benefits owed to retirees and public employees. The funded ratio for the largest 100 U.S. public pension plans was 71% as of June 30, according to Milliman.

In earlier decades, Calpers plowed into alternatives to stocks and bonds including hedge funds, private equity, timber and other commodities. Some of those bets failed to perform up to expectations after the 2008 financial crisis. Mr. Eliopoulos’s strategy was to pull out of hedge funds and try to make the portfolio less complex.

That meant undoing the work of several predecessors and limiting the number of outside managers handling Calpers’s assets. The retirement system severed ties with many private-equity, real-estate and other outside firms handling its money and explored other ways to invest in private equity without traditional pooled funds.

Board directors also agreed to a recommendation championed by Mr. Eliopoulos that the fund’s long-term investment target drop to 7% from 7.5% because of changing market conditions and a cash crunch.

Now Calpers Chief Executive Marcie Frost wants the system’s next CIO to have deep investment experience, said a person familiar with the matter. Mr. Eliopoulos hadn’t managed money on Wall Street before becoming the permanent investment chief in September 2014.

Mr. Meng had jobs at banks and investment firms before he worked for Calpers and the Chinese government. He was a bond trader at Morgan Stanley as well as a senior portfolio manager at Barclays Global Investors, a business now owned by money-management giant BlackRock Inc., according to biographies at universities where he has taught classes.

Mr. Meng joined Calpers in late 2008 as a portfolio manager for its fixed-income quantitative research group and later was promoted to help oversee the pension fund’s investment mix. One of his contributions was developing ways for Calpers to organize its investments around risks.

If he takes the job he would be the third chief investment officer named since 2009.
Randy Diamond of Chief Investment Officer also reports, CalPERS Selects New Chief Investment Officer:
Ben Meng, a former CalPERS portfolio manager who now works for the Chinese government foreign exchange office, has been offered the job as the California pension system’s chief investment officer and is in negotiations over his compensation, sources say.

“No candidate has accepted an offer,” Megan White, a spokeswoman for the largest US pension, told CIO in an email. She declined to comment further.

If Meng successfully completes negotiations with CalPERS management, he would replace Ted Eliopoulos, who announced in the spring that he would leave CalPERS by the end of the year.

Back in June, the CalPERS board approved a change that would allow the pension system to increase the top yearly compensation of the CIO, including bonuses, to as much as $1.77 million, up from the maximum $1.1 million Eliopoulos could have earned.

Meng was well-liked by CalPERS investment staffers during his tenure from 2008 to 2015, sources say. Meng started as a portfolio manager in the $357 billion plus pension system’s fixed income asset class in 2008. He was promoted to head of asset allocation for the fund in 2012.

Meng joined the Chinese government in 2015 as deputy CIO of China’s State Administration of Foreign Exchange, which handles foreign currency reserves of more than $3 trillion.

CalPERS is planning to hire a new CIO at a crucial time. The pension plan is expected to launch a $20 billion private equity direct investment organization, the first of its kind by a US pension plan, within the next few months.

At the same time, pension plan officials acknowledge that it may be difficult to even meet the plan’s 7% rate of return, which has been lowered from 7.5%, over the next decade.

CalPERS officials and its consultants estimate an annualized rate of return for the next decade of around 6.2%, though they say they believe CalPERS can earn the 7% rate of return annualized over the next 30 years.

In choosing Meng, CalPERS officials decided to hire someone with extensive investment experience, including tenure on Wall Street. Meng worked at several Wall Street firms before joining CalPERS in 2008.

Eliopoulos and his predecessor, Joseph Dear, were more known for their management experience than their investment expertise.
And John Gittelsohn of Bloomberg reports, Calpers Said to Discuss CIO Job With Ex-Portfolio Manager Meng:
The California Public Employees’ Retirement System has been in talks with Ben Meng, a former Calpers portfolio manager who is now an official with China’s State Administration of Foreign Exchange, to be its next chief investment officer, according to a person with knowledge of the matter.

“No candidate has accepted an offer,” Megan White, a spokeswoman for the largest U.S. pension, said in an email. The Wall Street Journal reported earlier Wednesday that Meng was the leading candidate.

Meng, who couldn’t immediately be reached for comment, worked for Calpers until 2015 in several investment roles when he left to join the Chinese government agency in charge of its foreign reserves. He is still negotiating the terms of his pay and bonus, which is based on the $360 billion fund’s performance, according to the person, who asked not to be identified because the contract talks are confidential.

“He’s a really smart guy,” JJ Jelincic, a former board member who worked with Meng in the Calpers investment office, said in a phone interview. “He’d be an excellent choice.”

The board voted in June to pay the next investment chief as much as $1.77 million, more than double the compensation of outgoing CIO Ted Eliopoulos, who plans to leave at the end of this year.
On Monday, CalPERS made it official, Ben Meng will be the next CIO.

Meng will have huge responsibility managing the assets of the largest US public pension fund.

CalPERS is a beast and it's always under scrutiny. Case in point, its CEO is under fire for supposedly lying about her educational credentials. It's a bunch of nonsense but some people love making a mountain out of a molehill.

Mr. Meng knows CalPERS and the politics all too well, he used to work there before as a fixed income portfolio manager. He has great investment experience and is now the deputy CIO of China’s State Administration of Foreign Exchange, the state agency in charge of more than $3 trillion in foreign reserves.

All that investment experience was a prerequisite for this job as he will be in charge of more than $360 billion in assets across public and private markets.

What is also interesting is CalPERS' new private equity model could push it in the global ranks:
The California Public Employees’ Retirement System (CalPERS), the largest private investor in the US, would likely move up in the global ranks under its plan to start a private equity direct investment organization, statistics and interviews show.

CalPERS’s $27.1 billion private equity program tops the US numbers currently among institutional investors and is seventh globally as of this month, show statistics from alternative investment data provider Preqin.

CalPERS plans to invest up to $6.5 billion annually, starting as soon as late 2018 or early 2019, if its board gives final approval to the direct investment program as expected. Another up to $6.5 billion would be allocated to its traditional private equity program, to grow or at least maintain the $27 billion allocated to its traditional private equity investments, CalPERS officials tell CIO. The combination would raise CalPERS’s profile in the global rankings.

The data shows that if other plans remain relatively stagnant in their private equity allocations as they have in the past few years, CalPERS could rise to fourth globally within a year’s time, just below the third-place sovereign wealth fund in the United Arab Emirates, which has $41.2 billion invested in private equity investments.

The two largest global private equity investors are the Canadian Pension Board with $61.4 billion, followed by the sovereign wealth fund in Kuwait with $52.4 billion, the Preqin data shows.

CalPERS could surpass the now fourth-ranked Central Provident Fund in Singapore with $39.4 billion and would very likely pass the fifth-ranked Ontario Teachers’ Pension Plan with $28.5 billion, and the sixth-ranked APB, the Dutch pension plan, with $27.8 billion.

CalPERS would also jump way ahead of the California State Teachers’ Retirement System (CalSTRS), which has the second-largest private equity portfolio in the US, with $20.8 billion in holdings, Preqin numbers show.

However, it’s difficult to make an exact estimate of how big the CalPERS program will get, because distributions also must be figured in. Even if its private equity allocations stay the same, each year at CalPERS and other pension funds, some of their traditional limited partner/general partner relationships wrap up after distributing profits.

But what is clear is that CalPERS, which is largest US institutional investor with around $360 billion in assets under management, will be building a much larger private equity program if its direct investment program becomes a reality.

It would also be able to use its well-known name in institutional investment circles to aim for success for its direct investment organization, said David Wessel, adjunct professor of finance and a director of executive education at the University of Pennsylvania’s Wharton School.

“CalPERS has a strong reputation that could help it attract investments,” said Wessel. The professor says that the key question is whether CalPERS will be able to get the right investment talent who can find the top deals necessary.

One part of CalPERS’s direct investment organization—called Innovation—plans to focus on late-stage venture capital details in technology, life science, and healthcare companies.

The second program—called Horizon—aims to make buy-and-hold investments in more traditional companies, eschewing the normal seven- to 10-year private equity cycle in the traditional funds CalPERS invests in as a limited partner.

CalPERS officials say they envision both Innovation and Horizon would grow to investment funds of $10 billion each over the next decade.

CalPERS’s traditional private equity program wouldn’t be neglected, even with the new direct investment organizations.

John Cole, a CalPERS investment director, told CIO that CalPERS needs to retain and grow its $27 billion traditional private equity portfolio, which is largely in co-mingled funds with general partners, in order for the pension plan to meet its desired goal, a 10% weighting of the total portfolio towards private equity.

Private equity currently makes up around 8% of CalPERS’s approximate $360 billion portfolio.

Private equity has also been its best-producing asset class over the last two decades.

Building the traditional CalPERS private equity program to a larger size will also mean that CalPERS will have to be able to make additional commitments in a competitive marketplace.

CalPERS statistics show that the pension plan only committed slightly over $3 billion in new private equity commitments in its traditional program in the fiscal year ending June 30, 2017, a number that has stayed relatively stagnant since the financial crisis.

However, that number is going up. Megan White, a CalPERS spokeswoman, said in an email that the commitment number increased to $5 billion in the fiscal year ending June 30, 2018. She said CalPERS expects it can commit $6 billion in the current fiscal year.

Commitments, however, don’t mean investments. CalPERS statistics show that the traditional private equity program still has more than $14 billion in dry powder, money committed by the pension plan but not invested by its general partners.

CalPERS is still conducting a review of its traditional private program. Six firms—BlackRock, Goldman Sachs Asset Management, Hamilton Lane, Neuberger Berman, AlpInvest Partners, and HarbourVest Partners—have submitted proposals to run all or part of CalPERS’s traditional private equity program.

Cole said CalPERS is still reviewing whether to outsource all or part of the traditional private equity program. A final decision is expected by the end of the year.

Sources familiar with all CalPERS operations say while part of the program could be farmed out, CalPERS officials are leaning towards retaining control over much of its traditional private equity program.

On the direct investment front, the CalPERS full board is also expected to see the final proposal for the direct investment program by the end of this year or early next year and then vote on whether to approve the program or not. A majority of board members have expressed support for the direct investment program and have already given a preliminary go-ahead for CalPERS to plan the two direct investment organizations.

While CalPERS would fund the two organizations, they would be run independently and would not be under direct control of the pension plan.
I've already covered how CalPERS is gearing up its direct program. CalPERS needs to outsource part of its PE program, the co-investment part so that it can scale fast into direct investments and lower overall fees.

Below, Part 1 of the August Investment Committee meeting. Listen to outgoing CIO Ted Eliopoulos go over total fund performance.

On Monday, they are holding their September board meeting. The agenda is available here.

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