CalPERS Scraps Outsourcing Private Equity Program

The California Public Employees’ Retirement System (CalPERS) has ended its consideration of a plan that would have seen a strategic partner play a key role in running its existing $27 billion plus private equity program.

BlackRock, Goldman Sachs Asset Management, Neuberger Berman, AlpInvest Partners, Hamilton Lane, and HarbourVest Partners had all submitted plans to CalPERS early this year detailing the role they would play in managing the largest private equity portfolio in the US.

John Cole, a CalPERS senior investment officer, told the investment committee at its meeting on November 13 that the plan is now off the table.

“A year ago, we thought maybe it would be best to find the large partner in a discretionary role to help us identify good funds and to expand our relationships to include more co-investing and access to secondary transactions,” he said.

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Cole said the six investment organizations that applied to help CalPERS were all outstanding. “But we have come to the realization after a lot of analysis and discussion that the structure is unlikely to meaningfully strengthen our organization,” he said.

Cole did not go into detail and CalPERS never specified whether the chosen firm would have run all or part of the private equity program, which is mostly invested in co-mingled funds with general partners.

CalPERS had been in exclusive talks with the world’s largest asset manager, BlackRock, before announcing that it was seeking proposals from a wider set of managers to be a strategic partner in the administration of the private equity program.

Cole did not rule out the firms helping CalPERS in an advisory capacity but said no decision would be made until CalPERS appoints a new private equity director in early 2019.

The pension plan has been without a private equity director since Real Desrochers left in April 2017 to join a private equity firm.

In another major announcement, Cole also disclosed that CalPERS is scaling back a program announced in 2015 by outgoing Chief Investment Officer Ted Eliopoulos to reduce the number of private equity managers from several hundred to 30.

The reduction was designed to allow CalPERS to focus its private equity commitments on top-tier private equity managers with the best returns. It was also supposed to simplify administration and allow CalPERS to get better fees by concentrating commitments in a smaller number of managers.

Cole said at the Nov. 13 meeting that the pension system had reduced the number of general partner relationships from several hundred to currently around 90 with a target of between 40 and 45.. “We think that makes sense in order not to dilute our impact and, as a result, the returns from the entire private equity portfolio,” he said.

CalPERS’s private equity consultant, Meketa Investment Group, questioned the wisdom last year of CalPERS cutting its private equity managers to 30, expressing concerns about missed investment opportunities.

In a November 2018 report, Meketa says that investment staff has sought to expand the list of managers with a continued focus on high-quality general partners. “The expansion of the manager set provides opportunity, not only to increase scale, but also pursue strategies beyond the mega and large buyouts in order to add portfolio diversification,” it said.

More than 60% of the CalPERS private equity portfolio is in buyout funds.

The private equity asset class is CalPERS’s largest-producing asset group in both the short- and long-term. The $361.1 billion pension plan is only 71% funded.

The private equity asset class provided CalPERS with a 16.1% net return in the fiscal year ending June 30, 9% over the 10-year period, and 10.5% over the 20-year period, shows CalPERS data.

CalPERS is also pursuing an expansion of its private equity program, pending board approval, creating its own $20 billion direct investment program that would invest in later-stage companies in the venture cycle and take buy and hold stakes in established companies.

The expansion would be managed by a separate organization, funded by CalPERS, that would have the power to make investments without the approval of the CalPERS board.

Cole did not give any indication when the CalPERS Investment Committee, made up of board members, would consider the plan. CalPERS officials had said they hoped to start the program by early next year.

Tags: BlackRock, CalPERS, Goldman Sachs, Pension, Private Equity

Ted Eliopoulos is leaving Friday, but new CIO Yu Ben Meng can’t start until January because of a non-compete agreement. Eric Baggesen will become interim CIO.

California Public Employees’ Retirement System (CalPERS) Chief Investment Officer Ted Eliopoulos is ending his 17-year tenure at the largest US public pension plan on Friday, but his replacement, Yu Ben Meng, remains stuck in China and will be unable to take over the investment reins of the $361.1 billion retirement plan until sometime in January.

Both Eliopoulos’ impending departure and the fact that Meng’s start date won’t be until sometime in January were announced at the pension plan’s investment committee meeting on November 13. CIO had reported before the meeting that Meng could not start sooner because he has a non-compete agreement with the Chinese government following his three-year tenure as deputy CIO at China’s State Administration of Foreign Exchange.

The agreement has prevented Meng, who was named CalPERS CIO in September, from joining the pension plan. Meng is also being prevented by the Chinese government from leaving the country until the non-compete expires, said former CalPERS board member and investment officer J.J. Jelincic. Jelincic has said he has had phone conversations with Meng from China. Several CalPERS sources confirmed Jelincic’s account to CIO.

Eliopoulos, in brief comment at the investment committee meeting, said that Eric Baggesen, a managing investment director who directs the pension plan’s asset allocation efforts, would take over as interim CIO until Meng starts in January. Meng had previously worked at CalPERS and had been one of the investment leaders of asset allocation efforts.

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It is unclear exactly when Meng’s non-compete expires and CalPERS officials on Tuesday weren’t specific as to what date in January Meng would start at the pension plan.

Meng had a senior leadership role in investing more than $1 trillion in China’s foreign currency reserves, including US dollars that were invested in Treasuries and US-listed equities. He is a US citizen, but was born in China

That may be part of his problem in terms of leaving the country.

“China treats people born in China as if they were Chinese citizens, even if they have acquired citizenship elsewhere,” Nicholas Yardy, a senior fellow at the Peterson Institute for International Economics and an expert on the Chinese economy, told CIO in an email.

In a surprise announcement in May, Eliopoulos said he would be stepping aside by the end of the year because of health considerations of one of his daughters who is attending college in New York City. Eliopoulos said it is important that he is within “reasonable distance” of his daughter.

Eliopoulos joined CalPERS in January 2007, and served as senior investment officer for the pension plan’s real estate asset class. He oversaw the portfolio during the great financial crisis when it lost more than 48% of its value. He was tasked with rebuilding the portfolio, reducing speculative office and land deals in place of a new emphasis on core real estate assets. In 2014, he assumed the role of CIO following the death of Joseph Dear from prostate cancer.

CalPERS officials and board members had originally hoped that the new CIO could work aside Eliopoulos for several months before he left CalPERS.

It is a particularly critical time for the largest US public pension plan. CalPERS officials are hoping to launch CalPERS Direct, a private equity organization that would invest in later-stage companies in the venture capital cycle as well as buy and hold stakes in established companies, similar to Warren Buffett’s strategy.

Eliopoulos in his remarks on Tuesday thanked CalPERS staff for their support during his tenure but did not address the fact that he would not be working side-by-side with Meng.

It is unclear if the investment committee will vote on the $20 billion direct investment organization at its December meeting or wait until after Meng takes over as CIO.

If CalPERS Direct becomes a reality, Eliopoulos won’t be around to see his biggest idea implemented. Eliopoulos had formally proposed the private equity direct investment organization, the first of its kind for a public pension plan in the US, in July 2017.

CalPERS has one more investment committee meeting this year scheduled for Dec. 17, which is the last meeting for Priva Mathur, the president of the CalPERS board and a proponent of the direct private equity investment organization. Mathur was defeated in a bid for reelection. The investment committee is made up of all 13 CalPERS board members.

Sources say that Mathur has told fellow board members that she would like CalPERS Direct approved before she leaves her post in early January.

Tags: Ben Meng, CalPERS, Eric Baggeson, Pension, Ted Eliopoulos