California Public Employees’ Retirement System (CalPERS) Chief Executive Officer Marcie Frost says the nation’s largest pension plan hopes to announce a replacement for Chief Investment Officer Ted Eliopoulos in September and get board approval for the launch of its $13 billion direct investment private equity program by November.

Eliopoulos announced in May that he would be leaving the $355 billion pension system by the end of the year due to family reasons. Frost told CIO in an interview Monday at the CalPERS retreat meeting in Walnut Creek, California, that an early hire would give the chosen new investment head the chance to work with Eliopoulos before his departure.

“That would give appropriate time for transition activities between the new CIO and Ted,” she said.

Frost said CalPERS is conducting an international search for the new CIO with the help of recruiting firm Korn Ferry and plans to interview candidates in August. She said both internal and external candidates are being considered.

Key qualifications for the job are extensive experience as an investor and as a team leader in a complex investment organization, like CalPERS, and the ability to communicate complex investment material to board members.

Eliopoulos was named CIO in 2014 following the death of CIO Joseph Dear. Eliopoulos had run CalPERS’s real estate program. He started in 2007, and witnessed the collapse of the program two years later during the great financial crisis, when it lost 42% of its value. He was credited with helping rebuild the program after the crash, moving assets away from speculative undeveloped land slated for residential properties to more core holdings like office buildings.

Eliopoulos said in May that he was leaving CalPERS because his younger daughter has been accepted to college in New York and had “significant health considerations.” The CIO said that he and his wife wanted to live closer to her.

Under a new compensation package approved by the CalPERS board in June, the new CIO with bonuses will have the opportunity to earn up to $1.77 million in a single year, more than twice what Eliopoulos was eligible to make.

Eliopoulos’ departure comes as he has pushed the investment committee to approve his plan to create a CalPERS-sponsored direct investment arm that would invest in late-stage companies in the venture cycle. It would also make direct investments private equity style in established companies, but in a buy-and-hold strategy, instead of the normal private equity fund cycle when portfolio companies are sold after seven to 10 years.

“We would be exiting on our own terms, not someone else’s,” Frost said of the buy-and-hold strategy.

The CalPERS direct investment organization would be a first for a public pension plan in the US in the private equity asset class. Canadian pension plans have made direct investments for years in private equity, but no US plan has attempted such a venture on a large scale.

Frost said the CalPERS board must still give final approval to the direct investment program and acknowledged that investment and legal staff was helping investment committee members with questions about the program.

CalPERS investment committee documents show that questions members want answered include start-up costs for the direct investment organization, its administrative structure, and what control the CalPERS board would have of the retirement plan-backed, but independent, organization.

Most committee members have expressed general support for the plan, but potential multi-million-dollar compensation to obtain top investment personnel has raised some concerns among investment committee members.

Frost said she was optimistic that investment committee members would have the necessary information by the November meeting, which is scheduled for November 13.

“If it’s possible, I would like to start executing on the strategy,” she said.

Private equity has been the plan’s best-producing asset class over the long year. For the fiscal year ending June 30, it returned 16.1%, beating out public equities, which returned 11.1%.

Frost said the concern is that the “competition for private equity investments is heating up” among institutional investors and CalPERS has been unable to get all the allocations it wants to expand its $27 billion program. CalPERS statistics show the program has actually been shrinking. Four years ago, the program had almost $29 billion in AUM compared to the current $27 billion.

Fees have been another issue: CalPERS paid around $700 million to private equity managers in base fees and profit sharing in the fiscal year ending June 30, 2017.

But it’s unclear just how much in fees, if any, would be saved from starting the direct investment program. The reason: CalPERS plans to continue its existing commingled fund program with private equity general partners which would side by side with the direct investment program.

One area of possible savings is by expanding private equity co-investments. Over time, CalPERS officials say they want to expand the private equity co-investment program, which amounts to around $2 billion of the CalPERS private equity program portfolio. Under the program, CalPERS invests alongside its private equity general partners, buying stakes in portfolio companies at reduced or no fees.

Frost said a report to the board on how to expand the program will likely not occur this year because the focus is on the direct investment program for now.

Tags: CalPERS, CIO, Private Equity, Ted Eliopoulos