CalPERS CIO on How Their 2030 Strategy Centers Around Private Markets

Amanda White of top1000funds recently interviewed CalPERS's CIO Nicole Musicco on how their 2030 strategy is centered around beefing up their private markets:

Private markets are the cornerstone of CalPERS’ 2030 goal and strategic destination according to CIO Nicole Musicco, which will include building capabilities inhouse for direct investing.

Musicco said there were “a ton of structural changes in the market right now” – pointing to the geopolitical, climate change and the interest rate environment – that were informing the fund’s strategic focus. She said the 2030 strategy will be centred around a larger illiquid exposure in a cost-effective way, “as we gear ourselves to best in class pension investors”.

“We feel fortunate in a way that we are a little late to the game in investing in alternatives,” she said. “Our illiquid exposure is a lot less than our peers and with the structural changes, where we truly feel there will be some dislocation, we are not suffering from the denominator effect like others are. And that speaks to opportunity. What we are spending a bunch of our time on is thinking about how we allocate more to illiquid areas.”

As a result, the fund is focused on improving liquidity management, understanding the portfolio risks and what it is willing to pay for those risks, as well as more cost-efficient allocations.

She said CalPERS’ view was that in the current market, dislocation was going to happen and business structures would be turned upside down.

“So we think this is a very interesting time for us to have some dry powder to invest in some of the more illiquid areas,” she said.

Musicco recently boosted the team with the appointment of deputy chief investment officer for private markets Daniel Booth , former CIO of the UK’s Border to Coast, and Anton Orlich as managing investment director for growth and innovation, as well as Peter Cashion as the new head of the sustainability program.

“I’m excited about the leadership and talent we have been able to attract,” she said. “Daniel is knowledgeable in portfolio construction and has real expertise in private markets. He has tools in his toolkit that will help with continuous learning and professional development to bring us to best in class status, and to be my partner in leaning into the private market space through that lens of what does it mean to be a great direct investor.”

Musicco, who has spent much of her career in private markets including Ontario Teachers, IMCO and RedBird Capital Partners, said over time the plan was to move to direct investing and bring knowledge and capability inhouse.

Orlich re-joins CalPERS after spending the past three at Kaiser as head of alternatives where he grew the alternatives allocation from 15 to 50 per cent of the portfolio. He also held roles as the head of private equity at the Pivotal Group, as a portfolio manager in CalPERS’ private equity program from 2013 to 2016 and was a former consultant at McKinsey & Co.

“We are bringing on folks with more direct investing capabilities and bringing in a more global mindset to our thinking. It is easy to have a north American focus if you don’t have diversity at the decision-making table,” she said. “We want to have more of a global exposure over time and more cost-efficient direct investment exposure over time. Co-investment has been part of the lingo for the past 15 years, but I’d like to move over time to direct investing. This will mean hiring in more people.”

Private equity is the highest performing asset class in the CalPERS portfolio and returned 21.3 per cent to the end of June 30, 2022. The board increased the strategic asset allocation to private equity from 8 to 13 per cent starting at the beginning of the 2022-23 fiscal year.

Nicole Musicco is doing exactly what she was hired to do, focus on beefing up private markets at CalPERS and attracting and retaining the right talent to be able to do this properly (ie. more co-investments and directs to lower costs).

Below, I show you CalPERS' asset allocation as of March 31st, 2023 (available here):

The first thing that strikes me is there is way too much public market beta in that portfolio.

In fact, 46% of the portfolio is public equities and 27% is in fixed income.

In a year like 2022, when both stocks and bonds got killed as inflation hit a 40-year high and central banks jacked up rates, that's 73% of your portfolio that is impacted by what is going on in these two public market asset classes. 

That's primarily the reason why CalPERS returned 3.3% for first 9 months of fiscal year which ends at the end of June.

In fact, while Private Equity produces the best long-term returns, it only makes up 12.2% of the total portfolio, which is decent but far below the allocation CPP Investments (32%) and OTPP (24%) have in this asset class.

Of course, both CPP investments and OTPP have dedicated teams in this asset class doing (mostly) co-investments to maintain a sizeable allocation and some purely direct (co-investments remain bulk of direct investing).

For CalPERS to double its exposure to Private Equity, it needs to beef up its team there and do a lot more co-investments with top funds all over the world.

I recently discussed how CDPQ will pump $11.2 billion in European private markets which includes private equity, real estate and infrastructure.

CDPQ just opened a new office in London which will be run by David Morley.

The Wall Street Journal recently reported that CalPERSis aiming to open additional offices to help attract investment talent, with an office in San Francisco expected to open by the end of 2023.

It may make a lot of sense to open an office in London and I know the perfect person to do this for CalPERS (Nicole knows him well).

We are heading into a very nasty and prolonged global recession over the next two years.

I know, the stock market is climbing the wall of worry but with a nasty recession ahead, it's only  a matter of time before it implodes.

Every day I see more evidence piling on that it will get really ugly out there:

I can go on and on but the point is there is a global recession which will hit us in the second half of the year and extend far into next year.

This means there will be dislocations in public and private markets as perceived risks shift abruptly.

And this at a time when fiscal and monetary policy cannot help because inflation remains stubbornly high (core inflation will persist as wage inflation pressures pick up).

What does this mean for Nicole Musicco and her team at CalPERS?

It means they need to select their partners carefully (she knows them all well) and make sure they deliver and provide great co-investment opportunities, and this during a very challenging time where all LPs will be demanding the same.

As far as VC and growth equity, I see a long, brutal winter ahead which is why Tiger Management is bailing out:

The easy money years are over, we have to get back to the 70s and 80s to make money in VC and growth equity (brutal but funds like Silver Lake and Thoma Bravo will continue to deliver stellar returns).

Anyway, all this to say I trust Nicole Musicco is doing a great job but it ain't going to be easy, that's for sure!

In related news, Amanda White also talked with CalPERS’ leadership trio to discuss culture, mission and responsibility:

CalPERS stands out among its global peers with three women leading the organisation as chair, CEO and CIO. Amanda White spent time (on zoom) with the group to find out what drives the leadership team and how collaboration and a shared mission are creating an innovative investment culture.

Marcie Frost, Nicole Musicco and Theresa Taylor are well aware of their responsibilities as the CEO, CIO and chair of America’s largest pension fund, the $443 billion CalPERS. Not only are they leaders of an organisation responsible for two million members, but they are an important exemplar for younger women looking at their career aspirations.

“We are representative of our two million Californian members, who are a lively and diverse group,” says Frost. “When people can see themselves represented, we build trust.”

It’s more of an accidental outcome that three women lead CalPERS, rather than any pre-ordained objective. Instead alignment of interest, shared values, and team work were a focus in hiring, with an understanding that women are under-represented.

Frost says when hiring for the CIO position conventional skills – such as managing a complex portfolio and different types of risks – were assessed but there was equally a focus on an ability to be collaborative, a focus on developing a world-class team and an alignment of values.

“Inter-personal relationships drive success in a large organisation,” says Musicco who was appointed the fund’s CIO in February 2022. “The relationship with Theresa and Marcie is important for leading, we all truly value diversity. Some of the initiatives we put in place when I first arrived included putting assets behind some of these ideas with a diversity lens. Decision making is positively impacted by the inter-personal relationship and aligned values we have.”

According to research conducting by as part of its Asset Own Directory only 12 per cent of the 350 largest funds in the world have women in any of the CEO, chair or CIO positions.

CalPERS stands out among that cohort as a very large, sophisticated organisation with women in all of the three roles at the top of the leadership hierarchy. Only two other funds, Australia’s HESTA and Teachers retirement System of the City of New York, have a woman in all three positions.

“We are in a unique position relative to our peers around the world. There was no intention to put three women in those senior positions, but having it as an outcome has been a great experience,” says Frost who as CEO oversees an operating budget of more than $2 billion.

“If there is one thing to come from it, it’s younger worker and mid-career women employees seeing three women running the organisation as an opportunity to see themselves in those positions. And it is an opportunity for us to make sure we are clear on the pathway to do that. How did I move from being a typist to a CEO? The value comes in the story telling, showing where we started to where we are today.”

“We are partners in the mission and the purpose of the organisation, there is a lot of energy in that.”

The focus on diversity at CalPERS is evident among its 2,843 employees, which includes 18 race and ethnicity groups, five generations, 26 languages and a gender split of 56.9% female to 43.1% male (amongst executives that split reverses and is one third female, to two thirds male).

Over the past two decades the fund has been refining its DEI practices and in 2021 introduced a specific framework outlining how it would integrate DEI into the organisation. This included the five priority areas of culture, talent management, health equity, supplier diversity and investments.

“Great progress is being made, DEI has become part of the culture and that is not a stagnant thing,” Frost says.

Some of the more practical applications have been technology to remove bias in recruitment, leadership training to avoid unconscious bias, an access initiative in consultant procurement, the appointment of chief DEI officer Marlene Timberlake D’Adamo and a twice-yearly update to the board.

“One of the board’s strategic policies is to internally and externally improve DEI with those we work with and our vendors, and making sure that it is throughout our portfolios,” says chair Taylor. “With the hire of Nicole and the leadership’s shared values we are now looking at investing appropriately to highlight DEI.”

The fund spends a lot of time investing in its own leaders in what Frost calls a supportive leader model where humility is encouraged.

“We are not trying to hire like-minded people, we want to have complimentary skill sets and creative chaos and that takes a lot to lead,” Frost says. “Finding leaders that understand humility is an important part of the role, we are here to serve the organisation not the other way around.”

Values manifest in the investment team

Through its investments CalPERS has a mosaic platform where it can put capital in the hands of diverse managers, influence change in the industry and promote diverse leaders.

“In our own hiring practices it’s on us to make sure we are at least shaking the tree to bring forward diverse candidates and go the extra mile to look through a different lens,” Musicco says. “Some of the things we have historically looked for have been biased and not geared towards people who have had to step out of the workforce for example. We need to be in front of that as senior women and make sure that conversation is happening.”

And the team is also spending more time leveraging its partner relationships to help operationalise the attraction of diverse talent.

CalPERS has been investing in emerging and diverse managers for 25 years. More recently it allocated $1 billion equally across TPG and GCM Grosvenor in strategies dedicated to investing in diverse alternative managers.

“People bring different biases and experiences in their own lives to the diligence table. We understand there is more than just coming to the table with a solid track record, it’s table stakes to show up with that, but I want to understand the personal drive piece and the benefits of diversity of thought,” Musicco says. “I want to understand people’s appreciation for collaboration and how flexible they will be.”

As organisations around the world have grappled with what the new normal working conditions look like, the three women at the top of CalPERS have been progressive with their approach acknowledging the benefits of flexibility.

“As women we have valued flexibility, women are usually wearing multiple hats and so we have seen the benefit of flexibility,” Musicco says. “This is an apprenticising business and we need time in the office but we also see value in flexibility and the value of getting women into investments. The hybrid working environment is an important part of CalPERS and fits the investment model.”

As CEO Frost says developing the hybrid model was one of the hardest decisions to implement well.

“We are a team oriented environment but a part of our jobs is more productive to do individually. We need to make sure the adults in the room will be making decisions that will stand the test of time,” Frost says. “We are one year in to hybrid work model with a 60:40 office split and have been investing in leaders to manage remote teams and lead in a different environment. Leaders do two things there’s the accountability piece and we have done a lot of work on performance measurement – that is not time watching but outcomes based – and then there’s leadership around support and flexibility and having employees feel comfortable and supported.”

Diversity in investments – 2030

As the fund sets its 2030 goal and strategic direction Musicco is focused on team culture.
“We need to build trust and bring people along, we value flexibility and diversity in what we are trying to achieve,” she says. “Most investment teams have not experienced the type of environment we have today and being able to step back and be more malleable in your thinking, and not have to know everything, is valuable.”

“The relationship that exists between the three of us makes for a special place to be right now.”

Part of the team culture also includes individual opportunities and Mussico wants all employees to be able to “lean in, put their hand up and carve out their own opportunity”.

“In a large organisation with long-tenured employees we are working hard to get a proactive culture. As women coming up through our own careers we know that waiting for jobs doesn’t happen,” she says.

Liquidity management and risk management are top of mind as the fund allocates into private markets in a more meaningful way.

“We are making sure we are leaning into private markets in a bigger, more thoughtful, cost-effective way, such as more direct investing,” Musicco says.

Part of that strategy includes more global diversity of investments and looking at where the dislocation is happening.

“It is easy to have a North American lens but we are trying to bring in more global exposure over time. Business structures will be turned upside down and it is an interesting time for us to have dry powder.”

Trust and a shared mission

For Musicco to be successful as the fund’s CIO and implement a lofty strategy, especially in private markets, it is imperative there is genuine trust with the CEO.

“I need to have unwavering trust with Marcie so she can be supportive of my big ideas, be willing to listen and give me resources. We have an open channel of communication. It is such a unique opportunity to have three women so aligned in our values and the mission implemented in a world class way,” she says. “The trust element is the most important thread, the relationship that exists between the three of us makes for a special place to be right now.”

From the board’s perspective trust is imperative. In a tough investing environment Taylor says the board is aware that investments like private equity cannot be ignored if the fund is going to achieve its targets.

“We have a history we can look at and see the impact of that,” she says. “We need to have trust. We are all aware we need to be supportive of what our investment office is doing, and as a board we are there to make sure the checks and balances are in place. It’s about collaboration and trust.”

For Frost the trust and focus comes from the aligned mission to pay benefits to the people who have dedicated themselves to working for the state of California. The fund pays out about $20 billion a year to retirees, which has an estimated impact of $28 billion in statewide economic activity.

“We are all very purpose driven, and genuinely like each other. We are partners in the mission and the purpose of the organisation. There is a lot of energy in that.”

It is exceedingly rare to see a female CEO, CIO and Chair of the Board at any pension fund, let alone the largest one in the United States.

These women are doing a great job but let me reiterate, we are headed for a very rough patch, this will not be a picnic, trust me on that.

"Yeah but Leo, all CalPERS has to do is write big, fat cheques of $250 million and up to elite private equity funds and make a killing."

Trust me, it will NOT be as easy as that in the environment we headed to.

Let me wrap it up there.

As far as DEI at CalPERS, Institutional Investor recently did an episode of II Confidential where Marlene D’Adamo talks about becoming the $456 billion pension fund’s first Diversity, Equity, and Inclusion Officer and how to get stakeholders on board with DEI initiatives.

Take the time to watch this interview here

Below, multifamily and commercial real estate has been the butt of the joke over the past year. As mortgage rates started to rise, commercial real estate investors were hit hard, as profits became pitiful and asking prices laughable. On the Market podcast did a deep dive there:

For months, the media has been predicting a commercial real estate crash, citing a wave of mortgages coming due with sellers who won’t be able to pay the high price of a refinance. And while these fundamentals aren’t wrong, a mortgage meltdown might not be a reality. So instead of speculating, we brought on Richard Hill, Head of Real Estate Strategy & Research at Cohen & Steers, to differentiate the facts from fiction.

Richard knows that loans are coming due, and buyers with low-rate adjustable mortgages may be in trouble. But that’s not the whole story, and some parts of commercial real estate could be primed for massive growth that residential investors have no clue about. The opportunities could be flowing soon for those who know where to look. 

In this episode, Richard will talk about the true risk of commercial real estate mortgages, which sectors are in the most trouble, which are being blown out of proportion, and how much investors can expect prices to drop. Plus, Richard gives his take on the three best times to invest in a quickly changing market like we’re seeing today. 

Watch the discussion below, it's excellent.