CalPERS Bringing Private Equity In-house?

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Mark Anderson of the Sacramento Business Journal reports, CalPERS bringing private equity in-house:
The California Public Employees’ Retirement System has said it will create a separate entity to make direct private equity investments.

Last week, the $349 billion Sacramento-based pension fund unveiled what it will call CalPERS Direct. Poised to launch in the first half of next year, CalPERS Direct will consist of two funds. One will focus on late-stage investments in technology, life sciences and health care, and the other fund will focus on long-term investments in established companies, CalPERS said in a news release. The pension fund plans to invest about $13 billion a year in private equity deals, with a goal of having 10 percent of its investment portfolio in private equity.

“Our investment team has spent months exploring options in order to design an approach to private equity that takes advantage of our size and brand,” CalPERS chief investment officer Ted Eliopoulos said in a news release. “We believe it will drive stronger private equity returns and help achieve economies of scale over time.”

CalPERS' move to create its own private equity investment vehicle is the latest step in its transition away from hiring outside money managers, as the pension fund looks to cut down its expenses on commissions and fees. CalPERS has already internalized 75 percent of its asset management, with most of that invested in publicly traded assets, Eliopoulos said in an interview on Bloomberg Television.

CalPERS Direct will be governed by a separate, independent board, Eliopoulos said. That structure “allows us to access the talent we need to invest in the private marketplace,” he said on Bloomberg Television.

As a separate entity, CalPERS Direct will be able to pay high enough compensation to bring in top investment talent, Eliopoulos said. If the new private equity managers were CalPERS employees, they would have to be hired under state government pay scales.

Through external fund managers, CalPERS has been investing in private equity since the early 1990s. Over the past 20 years, it's been the pension fund’s highest-returning asset class, with a 10.6 percent annual return, according to CalPERS.
Joshua Franklin of Reuters also reports, CalPERS to build $13 bln in-house private equity funds:
The largest U.S. public pension fund plans to set up two funds managing up to $13 billion to invest directly in leveraged buyouts, it said on Thursday, underscoring how major investors are looking to lessen their dependency on private equity firms.

The decision by the California Public Employees’ Retirement System (CalPERS), which manages $349 billion, follows similar moves by Canadian funds to staff up on direct investment teams in an effort to save money in fees in private equity firms.

Investing directly by leading one’s own deals goes a step beyond what some large pension and sovereign wealth funds have done in recent years, which is to team up with private equity firms to co-invest in corporate takeovers.

“We believe it will drive stronger private equity returns and help achieve economies of scale over time,” CalPERS’ chief investment officer, Ted Eliopoulos, said in a statement.

Private equity firms buy companies with the expectation of selling them a few years down the line for a profit. The industry pulled in a record amount of cash last year as investors turned to the asset class for public-market-beating returns.

However, larger money managers are keen to cut down on paying the fees demanded by firms, which typically collect a roughly 1.5 management fee and a 20 percent cut of any profits.

“The move by CalPERS is part of a broader trend amongst large institutional LPs, led by large Canadian pension, looking to disintermediate traditional fund managers to lower the cost of private equity and venture capital investment,” said James Gelfer, senior analyst at financial data firm PitchBook.

CalPERS Direct, which is expected to begin work in 2019 subject to final board approval and would only invest CalPERS money, would be made up of two funds. The first would target late-stage investments in technology, life sciences and healthcare, and the second on long-term investments in established companies.

CalPERS said its private equity program, which began in the early 1990s, has been the fund’s highest-returning asset class over the last two decades.

CalPERS in February said it lost 4.6 percent in value during the stock market’s tumble earlier this year, highlighting the appeal of private markets.
In related news, Arleen Jacobius of Pensions & Investments reports, CalPERS on lookout for emerging manager private equity fund-of-funds manager:
CalPERS is searching for a manager to run its private equity emerging manager program, said Megan White, spokeswoman for the $355.9 billion pension fund.

CalPERS launched the search in April in which it invited a targeted list of firms to compete, with responses due May 24. Incumbent Grosvenor Capital Management has been invited to rebid. Its contract expires in October. A hiring decision is expected in the fall.

Officials of the Sacramento-based California Public Employees' Retirement System have said they planned to commit up to $500 million in new capital to its private equity emerging manager fund-of-funds program between June 2016 when the plan was announced and 2020. CalPERS launched the program in 2012. Grosvenor manages $300 million.
As you can see, even though CalPERS' CIO Ted Eliopoulos is stepping down, the pension fund is busy beefing up its private equity portfolio.

No word yet on whether part of the private equity portfolio will be outsourced to BlackRock but something tells me a deal is imminent and Larry Fink is preparing for it.

Of course, the naked capitalism blog is busy criticizing CalPERS' every move, accusing the fund of issuing a false and misleading press release to try to railroad its board on a 'private equity enrichment scheme' and accusing the CIO  of five big lies on this super indirect private equity scheme.

Yves Smith loves the shock and awe approach in her blog comments. It's like she's trying to emulate Noami Klein every time she writes a post.

Alright, let me get to it. Yves is right on one point, this isn't direct private equity.  No Canadian or US pension fund is doing purely direct private equity deals on such a large scale. There have been some purely direct private equity deals in Canada but they are rare; the bulk of PE investments are still in funds and LPs co-invest with big private equity firms on some large transactions to lower overall fees or they bid on a portfolio company when the life of the fund ends.

Go back to read my comment on the Caisse going direct in private equity. I explain all this in great detail, don't have time to rehash it here. Yves Smith never bothered reading this comment carefully or else she wouldn't claim the Caisse "already does 2/3 of its private equity investing in-house and plans to go further in that direction. " (total rubbish!!!).

The important thing to remember is while there is a big push to lower fees in public and private markets, there is no US or Canadian pension fund competing with any of the large PE funds head on.

So get this notion of "direct private equity" out of your mind. It's never going to happen, ever, and it has nothing to do with the capabilities and competencies of the PE staff working at these pensions. The first phone calls on major private deals go to PE kingpins, not the heads of public pension funds.

The second thing I want to discuss is governance. Yes, it's true, this fund will have its own board but CalPERS is doing this for one simple reason Yves Smith fails to understand, there's too much politics at CalPERS limiting compensation at the fund. They need to create a separate entity with its own board to circumvent this and pay market rates for this PE fund.

I've said it before and I'll say it again, you pay people peanuts, you'll get mediocre results. If you want the Canadian pension model, you have to pay Canadian compensation or else forget it. you won't get the same results.

The important thing to remember is there is no way CalPERS can truly beef up its private equity portfolio or outsource part of it to whoever without creating this structure.

Stop reading garbage on naked capitalism. Sure, maybe CalPERS is trying too hard to spin this private equity venture and is exposing itself to some criticism but stop believing everything you read on naked capitalism. A lot of her assertions are laughable and full of it and fed to her by some CalPERS board members who have a hidden agenda.

Of course, it doesn't help that after questions raised about CalPERS CFO's background and experience, he's 'no longer with' the pension fund:
Charles Asubonten, whose background and experience came into question months after he was hired as the chief financial officer of CalPERS, is no longer with the giant pension fund, the organization acknowledged Monday.

The circumstances of Asubonten's departure from the CalPERS executive ranks are unclear. CalPERS made no announcement that he was leaving, but a spokesman acknowledged that he is "no longer with CalPERS." The spokesman said Asubonten's departure is being treated as a "personnel matter" and therefore no further information would be provided. His place will be taken on an interim basis by Marlene Timberlake D'Adamo, CalPERS' chief compliance officer. D'Adamo also served as interim CFO after the departure of Cheryl Eason in 2016.

CalPERS also declined to discuss the timing of Asubonten's departure. But at the May 15 meeting of the board's finance and administrative committee, at which he had been scheduled to give as many as six presentations, his place was taken by D'Adamo. Asubonten could not be reached Monday for comment.

Asubonten's departure should intensify questions about whether CalPERS management and its board members are up to the task of overseeing a $350-billion retirement and healthcare system serving more than 3 million present and past public employees and their families. The questions apply not only to Asubonten's qualifications, but the process that led to his appointment to a post with responsibilities requiring top-flight management skills and experience.

Treating his departure as a state secret won't quell these doubts. That's especially so given what appears to be CalPERS management's complicity in exaggerating Asubonten's work experience. CalPERS should come clean about the process.

Asubonten was named as CFO of the California Public Employees' Retirement System in September. As we reported last month, questions were raised by the financial blog nakedcapitalism.com about whether he had experience commensurate with the job, amid signs that his resume may have overstated his experience.

Among other issues, Asubonten claimed to have served as "managing director" of a private equity firm before joining CalPERS, an assertion CalPERS repeated in its press release announcing his appointment last year.

But that looked misleading: The "private equity firm" was a consulting firm Asubonten had founded that did no investing of its own. Rather, as Asubonten acknowledged in an interview with The Times, it consulted for investors overseas. Asubonten declined to discuss the scale of those investors. The managing director title appeared to be one he bestowed upon himself.
Let's face it, CalPERS screwed up "bigly" hiring Charles Asubonten as its CFO. This guy doesn't have the credentials to be the CFO of a $350 billion pension fund.

By the way, the CFO position is one of the most important positions for a lot of reasons and I think it's a critical position, so you need to hire the right person with the right qualifications for such an important job.

For example, Canada’s CFO of the Year Award finalist Nathalie Bernier knows this first-hand: the CFO of PSP Investments (PSP) has been leading the strategic transformation of her organization:



Take the time to read this interview with Nathalie Bernier to understand the responsibilities of a highly qualified CFO at a large pension fund.

I've seen a few qualified CFOs in my career, one of the best was Paul Buron, the former CFO of the Business Development Bank of Canada (BDC) who is now Executive Vice-President, Government Mandates and Programs Management at Investissement Québec (no, he didn't pay me to say this, I hardly know the man but was very impressed with his work ethic, leadership, and capabilities, he's as solid as they come).

Anyway, all this to say, if you're going to hire a CFO, get a top-notch CFO and pay them properly.

As far as CalPERS bringing private equity in-house, it's not what you think, it's basically a new structure to circumvent stupid compensation policies that don't allow CalPERS to pay its PE staff properly.

Capiche? Stop reading naked capitalism and start reading more Pension Pulse, I get straight to the point and I'm not going to waste your time with nonsense.

As always, if you have anything to add, email me at LKolivakis@gmail.com and I'll be glad to discuss.

Below, CalPERS CIO Ted Eliopoulos discusses the pension fund's launch of two new private equity funds, investing strategy and his departure from CalPERS. He speaks with Erik Schatzker on "Bloomberg Daybreak: Americas."

Notice how Ted explicitly states CalPERS will continue investing in PE funds but needs scale, which it will get through large co-investment opportunities through these existing relationships. It still needs to create a structure to hire qualified PE staff to quickly and thoroughly evaluate these co-investment opportunities as they arise.

And former CalPERS board member JJ Jelincic sent me the latest Performance, Compensation and Talent Management Committee and told me: "Look at minutes 40-50 about the ability to pay salaries. For context Richard Gillihan is the director of the California Department of Human Resources (the old department of personnel administration)."

I thank JJ for sharing this clip, it pretty much confirms my long-held belief that CalPERS has not kept pace with setting competitive compensation even though the board has the authority to do so.


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