CalPERS Unloads Record $6 Billion of Private Equity Stakes at Discount

Dawn Lim, Benjamin Robertson and Annie Massa of Bloomberg report CalPERS unloads a record $6 billion of private equity stakes at a discount:

The California Public Employees’ Retirement System sold about $6 billion of its stakes in private equity funds to second-hand buyers, severing ties with a slew of past managers and freeing up cash for new wagers.

The $440 billion public pension fund, the largest in the US, has cycled through four investment chiefs since 2009 and has long wrestled with the complexity of its $50 billion in private equity holdings. Calpers hired Jefferies Financial Group Inc. to explore ways to clean up its portfolio and shop a swath of assets, according to people familiar with the matter.

Lexington Partners, an investment business of Franklin Resources Inc., and CVC Capital Partners’ Glendower Capital snapped up pieces in separate sales that wrapped up over the past two weeks, said the people, who asked not to be identified discussing private transactions. The deal is not only the largest of its kind by Calpers, but private equity executives said it’s probably the biggest-ever involving second-hand fund stakes changing hands.

Trading in such size came at a price: Calpers sold its holdings at a roughly 10% discount to their value in September 2021, some of the people said. The fund softened the blow thanks in part to how it structured the deal, they said.

The blockbuster transaction generates money for investment chief Nicole Musicco, who took over earlier this year, to make new wagers as markets remain volatile. She has told Calpers directors that she wants to build a team that would buy stakes in private companies. That would let Calpers gain more control and bypass private equity firms like Blackstone Inc. or Carlyle Group Inc.

“The sale positions us to act on our new asset allocation and allows us to capitalize on market opportunities,” Musicco said in a statement to Bloomberg. Calpers drew up plans last year to increase private equity and grow private debt.

Representatives for Lexington, Glendower and Jefferies declined to comment.

Secondary Slowdown

Pensions and endowments are among large institutions taking advantage of the rise of so-called secondary buyers -- other deep-pocketed investors willing to take on older, unwanted private equity stakes that are typically hard to sell and value. These kinds of trades totaled $63 billion in 2021, a record high, according to Campbell Lutyens & Co.

Wall Street is bracing for a slowdown in trading private equity stakes. With markets in flux, some sellers are hesitant about striking deals at steep discounts.

The haircuts for various assets sold by Calpers range from high single-digit percentages to about 20%, some of the people said.

In a move to make any discount less punitive, Calpers opted to defer some payments beyond June 30, the last day of its fiscal year, people said. That allows Calpers to continue collecting some of the cash generated by the investments. And by not taking all of the sale proceeds upfront, Calpers can avoid a large balance of undeployed cash, which would drag down performance for the latest fiscal year.

Calpers, like many public pensions, doesn’t have all the assets needed to meet future promises to retired police, firefighters and other state workers. If the funds can’t meet their return benchmarks, it puts the onus on taxpayers to help fill the shortfall.

Portfolio Rework

Lexington and Glendower took over a mixed bag of older funds that include buyout and growth strategies. The deal helps Calpers break ties with some managers it invested with previously.

Calpers, one of the earliest public pension funds to get into private equity, has seen its returns in the asset class trail peers over time as rivals crowded into buyout funds in search of higher returns.

Various Calpers leaders have tried to remake the pension’s sprawling private equity portfolio, but some ran out of time or faced challenges getting support from others at the fund.

Ted Eliopoulos tried to slash the number of managers during his tenure as CIO from 2014 to 2018. Under Musicco’s predecessor, Ben Meng, Calpers expanded coinvestments, which are typically deals done alongside funds to help curb fees.

The pension fund has continued to ramp up coinvesting, one of the people said.

In late February, I covered Nicole Musicco's appointment as CalPERS' new CIO here.

I got to speak with her and Marcie Frost, CalPERS' CEO, and we covered a lot.

Since arriving at CalPERS in late March, Nicole has hit the ground running, really getting to know the entire portfolio well, especially in private markets which is her area of expertise.

Not surprisingly, a huge part of her focus has been looking at the $50 billion CalPERS private equity portfolio and she clearly didn't like a lot of funds in there and decided it's time to unload huge stakes, even if it means unloading them at a discount.

According to the article, the haircuts for various assets sold by CalPERS range from high single-digit percentages to about 20% but on average, it was a 10% discount.

A 10% discount may seem steep but there is an opportunity cost to holding these assets in your book and the longer CalPERS took to make this decision, the worse the haircuts would have been.

Private market valuations lag those in public markets and their day of reckoning hasn't come yet although there are signs that tougher times lie ahead.

The article also states:

In a move to make any discount less punitive, Calpers opted to defer some payments beyond June 30, the last day of its fiscal year, people said. That allows Calpers to continue collecting some of the cash generated by the investments. And by not taking all of the sale proceeds upfront, Calpers can avoid a large balance of undeployed cash, which would drag down performance for the latest fiscal year.

CalPERS CIO Nicole Musicco states this concerning this record sale of private equity stakes in the secondary market: “The sale positions us to act on our new asset allocation and allows us to capitalize on market opportunities.” 

The way I read this is there are better opportunities elsewhere and I give her and the CalPERS team and Board a lot of credit for pulling this massive sale off at this time. 

It was high time CalPERS revamped its private equity portfolio in a meaningful way, something previous CIOs tried to do but were not successful, so Nicole obviously has the trust and backing of her CEO and board of directors.

As far as CalPERS' new asset allocation, Michael Katz of Chief Investment Officer reports it kicked in at the start of this month: 

The California Public Employees’ Retirement System’s new asset allocation, which increases its alternative investments while reducing its public equity holdings, takes effect July 1.

“Over the past decade we’ve made strides to improve our funded status and reduce investment risk,” CalPERS said in a tweet. “We’ve increased liquidity, taken more defensive positions in the public markets and added a prudent amount of leverage to increase diversification.”

After nearly a year of reviewing the pension system’s investment portfolio and actuarial liabilities, the CalPERS board decided in November to adjust the asset allocation of its $442 billion portfolio by increasing its private equity weighting and decreasing its public equity holdings. The board also approved adding 5% leverage to increase diversification.

The new asset allocation target is 42% in global equity, 30% in fixed income, 15% in real assets, 13% in private equity and 5% in private debt. CalPERS said the allocation adds up to 105% due to the 5% allocation to leverage. The current target asset allocation is 50% global equity, 28% fixed income, 13% real assets, 8% private equity, 1% liquidity and 0% in private debt. According to CalPERS’ most recent monthly update, the portfolio’s actual asset allocation as of May 31 was 45.5% in public equity, 27.1% in fixed income, 14.6% in real assets and 11.7% in private equity.

Although the change goes into effect today, “it will not be like flipping a switch,” a CalPERS spokesperson says. For example, if the investment team doesn’t immediately see any strong private equity investments, the staff will have to wait before they increase their investments to private equity.

“It’s a balance of aligning as close as possible to the new allocation, while also considering the current market and making the best decision to achieve the strongest returns/balancing risk for the fund,” says the spokesperson.

The review process that went into the decision to adjust the allocation, which takes place every four years, included a review of demographic assumptions, including life expectancy, retirement and disability rates and potential changes in job growth and salaries, according to CalPERS. A press release from the fund says the board examined different investment portfolios and their potential impact to the CalPERS fund, and that each portfolio presented a different mix of assets and corresponding rate of expected return and risk volatility. The release also says that CalPERS’ most recent findings show that life expectancies of healthy members at age 55 increased slightly from the last study in 2017, as men are expected to live approximately eight months longer and women five months longer since the previous study.

It's important to note this change in asset allocation has been in the works for a year now, long before Nicole Musicco arrived as the new CIO. It's part of an asset-liability review CalPERS does every four years.

In other related news, Sarah Rundell of top1000funds reports that CalPERS is weighing incentives and benchmarks in the battle for talent:

At CalPERS’ latest performance, compensation and talent management meeting, committee members continued to discuss changes to the $500 billion pension fund’s compensation program to make it more competitive in attracting and retaining staff.  CalPERS’ efforts to modernise the process reflects a sector wide struggle as other institutional investors including the Teacher Retirement System of Texas and the $83.4 billion Alaska Permanent Fund Corp struggle to fill a swathe of investment positions.

Returning to the board with their latest revisions, compensation consultant Global Governance Advisors’ Peter Landers and Bradley Kelly offered more detail on how to evolve the pension fund’s compensation, building on an April presentation when Kelly warned that complacency is the kiss of death for any organisation, especially public pensions, in today’s tight recruitment market.

Among the measures are plans to widen the peer group of funds that CalPERS compares its compensation levels against to include larger private sector firms, and introduce salary packages that have more incentives attached including an annual incentive plan that focuses on total fund results.

Regular review

The determination and assessment of compensation at CalPERS can lag peer funds. Although reviews may not always lead to salary adjustments, they need to be more frequent and regular. In a worse-case example, committee members heard how the compensation for CalPERS’ chief actuary position wasn’t adjusted over a 14-year period.

“Avoid major delays; our recommendation is you set a regular scheduled assessment roughly every two years to make sure you stay aligned with the market,” said Kelly, a partner at GGA.

The committee also reflected on the importance of CalPERS aligning pay, and benchmarking its compensation, with investors with a similar half trillion dollar assets under management.

“Your fund is growing; you want to make sure you are constantly benchmarking against similar-sized organisations,” said Kelly, later adding that alignment helps ensure CalPERS hires people best positioned to understand the size and complexity of the portfolio.  The board also discussed the importance of ensuring the benchmarking process compares CalPERS to other public pension funds and public state agencies, not just the private sector in a blended peer group.

Internal vs external

The committee also heard how, in some cases, internal candidates had been discouraged from applying for positions because of a perception that external candidates are more highly valued. GGA recommended putting in place a fair, transparent and objective assessment that treats external and internal candidates the same.

Moreover, there is a perception that external candidates are hired at the upper end of pay bands while internal hires, coming into new positions from within the fund, tend to sit at lower compensation bands.


Although CalPERS cannot compete with private sector compensation, the pension fund can retain talent by offering a compelling quality of life and purpose in a value-add package. For example, the board heard how New York State Common Retirement Fund has successfully hired a senior investment professional from BlackRock.

“People in the private sector look at these pension funds as an opportunity,” said Kelly.

Board member Theresa Taylor added: “For some, it’s all about the experience of wanting to work in a pension fund for the mission.”


CalPERS is planning to introduce an annual incentive plan that focuses on total fund results for incentive eligible positions. For now, suggestions that incentives incorporate returns of the asset class in which an investment executive works are on hold.

Discussions on the importance of rewarding talent and meritocracy at CalPERS captured some of the challenges in its pay structure. For sure, people shouldn’t be rewarded just because; the organisation needs to ensure everyone gives their all every day and are not keeping their seat warm for guaranteed incentives.

Yet higher levels of pay based on merit opens the potential for large pay differences and disparities between executives and rank and file workers that could lead to attrition among these essential employees.

Last year CalPERS approved a plan to pay its new chief investment officer, Nicole Musicco, annual and long-term incentives as much as 100 per cent to 150 per cent of an annual base salary ($707,500) based on investment performance.

Approved proposals will come to the full board at a later date.

Compensation is critically important not just at CalPERS but at every single large pension fund in the world.

US public pensions have long struggled with these issues but as assets under management grow, they need to ensure their compensation is competitive to attract and retain talent. 

The independent governance at Canada's large pension investment managers has allowed them to maintain a very competitive compensation package to internalize asset management as much as possible, lowering costs and delivering outstanding long-term results.

US public pensions are simply not there as there remains way too much political interference. But this regressive and antiquated governance model needs to be revamped once and for all to allow them to implement a more competitive compensation package, not just at the CEO, CIO and senior levels, but throughout their organization.

You need to attract and retain qualified and competent people at every level to be in a position to deliver solid long-term results and teach the next generation how to manage assets properly.

It's mind-boggling that in 2022, with CalPERS managing close to half a trillion in assets, we are still debating whether more competitive compensation is required and desirable.

It most certainly is, maybe not as much as private equity funds pay but make it attractive enough to attract highly qualified people looking for purposeful and engaging work at a large public pension plan. 

 I'd also recommend you read an article from Egon Zehnder, 4 Strategies for Asset Owners to Win Top Investment Talent in a Fierce Market, written by Shawna Carter and Obinna (Obi) Onyeagoro.

They do a wonderful job explaining four tactics that can help an asset owner attract, develop, and retain an outstanding in-house investment team. 

Also, since I am on this topic, AIMCo’s CEO, Evan Siddall, recently wrote an amazing op-ed on how to win workers and restore loyalty in the workplace.

Let me get to the heart of it:

As our economy has matured, jobs require more intellect and nuance. Workers are more skilled and more capable. They don’t need to be told where and when to do their jobs. They resist micromanagement and are able to work with reduced supervision. We need to look past obsolete models of hierarchical control adapted from military command for a manufacturing economy.

People want purpose-driven work. Dan Pink identified three factors – purpose, autonomy and mastery – as the core sources of employees’ extra discretionary effort in his 2009 book, Drive: The Surprising Truth About What Motivates Us. It is the combination of these three drivers that increases productivity, instills a commitment to customer service and creates fertile ground for innovation. And they find the most value and satisfaction in their work when we, as leaders, trust them to do it well.

At AIMCo, we are changing the manager-employee relationship and supporting a “choice first,” results-only work environment.

Four key elements reinforce a culture of trust and respect:

1. Let employees choose: Work is personal. It is a huge mistake to dictate working conditions to employees. Task teams to be deliberate about determining the kind of collaborative work best done in person. Work that supports apprenticeship/learning, team alignment and innovation/brainstorming are often, but not always, examples. We have asked our teams to define how they choose to collaborate. The decisions are ultimately theirs.

2. Measure what matters: Performance management should never have been about management by line of sight. Use an outcome-based goal-setting methodology to ensure leaders and employees are all focused on the same measurable goals. Give feedback often, far more frequently than monthly check-ins.

3. Retrain people leaders: The potential weak links in this new system are managers’ bad habits. A “results only” mindset requires them to unlearn old ways. Moreover, heading blindly into new workplace conventions is reckless without a new, coherent support system. That may mean looking outside your organization for help to train people leaders.

4. Flatten the organization: Consistent with more employee autonomy is a lighter managerial hand. We have also adapted our organizational structure by increasing people leaders’ spans of control (number of direct reports). This gave us the opportunity to “high grade” our management cohort and lighten managers’ touch.

Employees just want a little respect. Both Stephen Covey and Richard Branson have been quoted as saying, “Treat your employees the way you want them to treat your customers.”

Employers ought to trust their employees to make decisions that will allow them to do their best work. Rather than scrambling haphazardly to block the exits, we intend to light the way to the entrance, allowing us to attract and retain the strongest calibre of colleagues, who will help us continue to deliver superior results for our clients and their beneficiaries – the people of Alberta.

It’s actually that simple.

It truly is that simple but it isn't straightforward as old habits, or old ways of thinking about work, don't die easily. 

Also, there's a reason why big cities can't get workers back to the office, remote work/ hybrid model based on trust and outcomes will win the battle for talent in a post-pandemic world. 

Lastly, I know it's Friday, I haven't chatted about markets in a while, so here are my quick thoughts:

  • Stocks and bonds have rallied since the last US CPI report came out on June 14th.
  • Growth fears (recession) seem to have overtaken inflation fears which is why commodities have sold off, dragging down metals and energy shares.
  • Technology has led the way recently led by a few mega cap stocks and hyper-growth Ark Innovation stocks (worth noting ARKK made a 2-month high this week but it's well off its highs)
  • People are still debating whether the Fed will continue raising rates (it will hike another 75 basis points soon) or whether we are headed into a recession (we likely are already in a technical recession but Wall Street doesn't see it or really care). 
  • Lots of talk about China opening up and this will be good for markets in the second half of the year. But while the Chinese economy is recovering, its foundation is shaky, Premier Li Keqiang was quoted by state media as saying on Thursday, as economists offered sober assessments.
  • Finally, the US jobs report was stronger than expected today but it's not what traders are looking at right now. They're positioning for a softening of US CPI next week and that's why risk assets are rallying, led by tech shares which outperform when rates go lower and the economy slows.

I've been reading a lot of great material, mostly from Francois Trahan of Trahan Macro Research (read his latest on what can make him bullish even though he's still bearish) but from other sources too and my Twitter feed carries a lot of  interesting market retweets (admittedly, I don't retweet everything I find interesting, it's overwhelming).

Alright, let me wrap it up there, wishing everyone a nice weekend.

Below, the California Public Employees’ Retirement System sold about $6 billion of its stakes in private equity funds to second-hand buyers. Brian Chappatta has more on "Bloomberg Markets: The Close."

I don't think CalPERS wants to go it alone, I see it wanting to develop closer relationships with trusted partners who will provide them with great co-investment opportunities and knowledge transfer,

I trust Nicole Musicco, she knows what she's doing, the media needs to measure the long-term results of her renewed strategy and CalPERS needs to bolster its compensation at all levels to attract and retain top talent.

I embedded the CalPERS Investment Committee from June 13th below where she speaks at the beginning. 

Also, Jeremy Siegel, Wharton professor of finance, joins 'Closing Bell: Overtime' to discuss his read on the jobs report, stating it's a lot weaker than it appears. Listen closely to his comments on the huge drop in hours worked.

Fourth, Michael Kantrowitz, Piper Sandler chief investment strategist, joins 'Power Lunch' to discuss why the economy will get worse from here and which stocks he would buy and sell given his macro views. 

Kantrowitz worked with Francois Trahan at Cornerstone Macro so I am not surprised he shares similar views on the economy and markets. He thinks this is likely another bear market rally and posts his market thoughts on Twitter here.

Lastly, Tom Lee, Fundstrat managing partner, joins 'Halftime Report' to discuss his bullish case for stocks in the second half.