CalPERS Gives $500 Million to New Private Equity Fund of Funds

The California Public Employees’ Retirement System (CalPERS) has committed $500 million to an emerging manager fund of funds run by GCM Grosvenor as part of efforts to increase its private markets emerging manager program.

Retirement system spokeswoman Megan White confirmed the hiring of GCM Grosvenor in an email to CIO, saying the decision was made in November. GCM Grosvenor already runs two other private equity emerging manager fund of funds for CalPERS, overseeing the investments of more than $300 million by several dozen private equity firms.

Under CalPERS rules, the new $500 million commitment was approved by investment staff and bypassed the investment committee.

The new commitments to GCM Grosvenor will bring the amount of capital it oversees in emerging manager private equity fund of funds to approximately $850 million.

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California law prohibits woman and minority set-asides, but CalPERS has been active in encouraging a diverse set of managers to apply to manage money for the $345.6 billion pension system. Some members of the California state legislature have also put pressure on the pension system to hire more woman and minority-owned firms. At the same time, CalPERS must keep in mind its fiduciary duty and its duty to generate the best returns possible within acceptable risk standards.

The first GCM Grosvenor emerging manager fund of funds, GCM Grosvenor Dem, with a vintage year of 2012, has an internal rate of return of 8.9% and an investment multiple of 1.2x as of March 31, 2018. The results are in the lower end of the system’s private equity returns, show system statistics.

The second fund, GCM Grosvenor Dem II, has a vintage year of 2014, so it is still in its investment cycle. Results as of March 31 were 7.6% with an investment multiple of 1.1x

The issue of GCM Grosvenor picking a diverse set of managers for its private equity fund of funds came up at a Dec. 10 investment committee meeting.

Sara Corr, CalPERS interim private equity managing investment director, disclosed that approximately one-third of the $300 million in the first two GCM Grosvenor emerging manager funds has gone to firms with investment teams spun off from large private equity firms.

Board member Dana Hollinger, who brought up the issue, noted that if offshoots of industry-leading giant private equity firms “like KKR” were receiving CalPERS contracts, it defeated the intent of the private equity funds of funds.

“In other words, we’re taking the top kind of maybe rich white guys and making them richer,” she said.

Clint Stevenson, investment director of the CalPERS investment manager engagement program, told the investment committee that his program has reached out to a broad segment of managers to increase diversity. He also pointed out that California law does not allow the pension system to have specific diversity targets.

He did say that CalPERS has broadened rules allowing private equity managers raising their first, second, and now third private equity fund to be considered emerging managers in efforts to cultivate a larger pool of candidates to be eligible for the fund of funds.

The emerging manager funds of funds are part of CalPERS’s $28 billion traditional private equity program, which mostly consists of CalPERS investments as a limited partner with other institutional investors in funds run by general partners.

CalPERS officials are also hoping to launch within the next several months a more direct private equity program. That program would aim to invest $20 billion over the next decade: $10 billion to Horizon, a CalPERS-backed organization that would invest buy-and-hold stakes in established companies, and $10 billion to Innovation, which would invest in late-stage venture capital companies in the technology, life science, and healthcare sectors.

The program is expected to come before the CalPERS investment committee in February or March.

Tags: CalPERS, GCM Grosvenor, Pension, Private Equity

The board of the $24 billion San Francisco Employees’ Retirement System has approved terminating money manager Fidelity Institutional Asset Management’s Select International small cap equity strategy due to underperformance relative to its benchmark and other money managers.

A video stream of the system’s Jan. 9 meeting shows the board unanimously terminated the strategy. The system’s investment in the strategy totaled $174.5 million as of Dec. 31, but made up 6.5% of the approximate $3.5 billion small cap strategy, SFERS documents show.

Fidelity Institutional Asset Management is part of the much larger Fidelity Management & Research, commonly known as Fidelity Investments. It is one of the world’s largest assets managers with around $2.5 trillion in assets.

A SFERS memo from its investment staff gives a rare, inside view of issues inside Fidelity concerning the investment strategy.

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The Jan. 9 memo notes that the San Francisco pension system has not been the only institutional investor pulling money from the strategy, as it saw $1.9 billion in net outflows from January 2016 through Sept. 30, 2018.

SFERS first put $240 million in the strategy in August 2011, which peaked at $350 million in Sept 2016. The memo said since then, SFERS has redeemed a total of $200 million from the strategy. It placed the strategy on its under-review list in the fourth quarter of 2017.

The memo said in each of the past three years, the strategy has underperformed its benchmark while also ranking in the second half of a universal of other manager strategies.

“The strategies’ performance has been pretty pedestrian,” SFERS Chief Investment Officer William Coaker Jr. told the board. “We are looking to upgrade the portfolio and increase our excess returns,” he said.

SFERS returns data show the Fidelity strategy saw returns of -10% for the one-year period ending Nov. 30 compared to the MSCI World ex USA small cap benchmark’s return of -9.9%. For the three-year period, the strategy returned 4.8% compared to the benchmark’s return of 6.2% and for the five-year period, the strategy returned 3.7% compared to the benchmark’s 4.1%.

The SFERS memo notes that a 2010 report by its then-investment consultant, Angeles Investment Advisors, recommended that Fidelity be hired due to then-strong performance in the strategy, but also expressed caution if there were portfolio management changes. It said the memo noted the importance of portfolio manager Rob Feldman as the “key decision-maker on the portfolio” and that “his departure from the team for any reason would be a cause for immediate concern.”

The memo says that SFERS was notified by Fidelity in the first quarter of 2018 that Feldman would be stepping back from his role. It says that Feldman is listed at the strategy as a co-portfolio manager, but that he is on long-term leave because of health issues. In an email to CIO on Tuesday, Fidelity wrote, “Rob Feldman is facing health issues, but remains actively involved on the strategies as co-portfolio manager.”

SFERS noted in the memo that Feldman was replaced by Shah Badkoubei as lead portfolio manager in March 2018. Badkoubei had been associate portfolio manager since 2013.

Fidelity also appears to have been the victim of SFERS’s move to smaller money managers.

The SFERS memo said that Fidelity Institutional Asset Management, the Fidelity group that ran the SFERS strategy, was quite large.

“The public equities portfolio is shifting towards smaller, more nimble firms with a singular investment focus,” it said. “Staff believes that FIAM does not meet these criteria given their sizeable assets ($164 billion as of Sept.30, 2018) and the number of strategies (80) that they manage.”

The memo said SFERS is looking to hire concentrated, high-conviction strategies and notes the largeness of the Fidelity strategy, with approximately 200 positions.

Last month, the SFERS board approved a $500 million allocation to an international stock strategy run by Select Equity Group as part of a restructuring of its public equity portfolio. Select is a smaller manager that runs high-conviction, concentrated strategies. Coaker told the board at the Jan. 9 meeting that the hiring of Select was an example of “upgrading” the SFERS equity portfolio.

Three other international equity strategies were also added to the watch list last month by SFERS: the William Blair international growth strategy, the DFA international small cap strategy, and the AQR international strategy—all of which have had performance problems.

Public equities make up $8 billion of SFERS’s $24 billion portfolio, but Coaker expects to reduce the size of the equity portfolio by around $2 billion in the next several years as part of the restructuring that is allocating more assets to private markets.

William Blair, DFA, and AQR have all seen the amount of money they manage for SFERS trimmed and Coaker has said that additional cuts could occur without improved performance.

Tags: Fidelity, Pension, San Francisco Employees’ Retirement System (SFERS), terminations