CalPERS Throws Weight Behind Mega-Managers, Successful Startups

America’s largest pension fund is halfway through culling its manager roster from roughly 300 down to 100, but the overhaul may actually benefit its emerging managers.

Or, rather, its high-performing small managers.

“Our goal is to have fewer, more strategic relationships with external managers,” Ted Eliopoulos—CIO of the California Public Employees’ Retirement System (CalPERS)—told the fund’s investment committee during a meeting Monday.

“The strategic portfolio restructuring includes our ongoing commitment to emerging managers,” he continued. To this end, the fund is creating “a new opportunity for successful emerging managers to compete for new capital commitments and transition to larger direct relationships in CalPERS’ portfolio.”

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Firms in its existing incubator program often outgrow the “emerging manager” label before amassing sufficient size to qualify for regular mandates, according to investment staff. Portfolio Manager Laurie Weir called this “a kind of a limbo,” which CalPERS aims to solve in its ongoing restructure.

“The new manager transition program will provide the opportunity to invest in follow-on funds with incrementally larger commitment amounts,” Weir said. This would give CalPERS staff “significant additional time to test and improve the skills and capacity of investment manager firms.”

Private equity, real estate, and global equity divisions can source transition candidates from both inside and outside of CalPERS’ emerging manager program, Weir said. These middle-sized firms will be evaluated first via track record, then on strategy, value creation, management team and talent, asset allocation, portfolio fit, and finally alignment of interest with the pension fund.

“Managers will have to constantly compete to meet or exceed expectations in order to remain in the manager transition program,” Weir noted.

She estimated that CalPERS will commit up to $7 billion to approximately 15 transitioning managers over the next five years.

CalPERS EM Slide

Related Content:CalPERS Plans to Cut Managers by 50%

Two of the largest Canadian funds have joined forces to invest in a London-based environmental consulting firm.

The Ontario Municipal Employees Retirement System’s (OMERS) private equity arm and the Alberta Investment Management Corporation (AIMCo) acquired Environmental Resources Management (ERM) for $1.7 billion from private equity firm Charterhouse Capital.

“We consider our investment in ERM to be further evidence of the private equity group’s ability to execute on its strategy of direct investing.” —AIMCo“There is no better endorsement of the OMERS model which provides the environment for management teams to thrive, while building great businesses,” said Mark Redman, senior managing director of OMERS’ private equity division.

The C$72 billion ($58 billion) pension fund said the club deal would bring OMERS’ capital deployed in Europe to more than C$2 billion.

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AIMCo’s Head of Private Equity Peter Teti also said the co-investment acts as “further evidence of the private equity group’s ability to execute on its strategy of direct investing.”

According to ERM, the Canadian funds would support the consultancy’s management to expand its business by further increasing market share through new services, strategic acquisitions, and moving into international markets.

The joint investment is the latest of Canadian funds’ increase in private direct investments. Last week, the Canada Pension Plan Investment Board (CPPIB) agreed to purchase GE Capital’s private equity-lender Antares Capital for $12 billion—the C$265 billion fund’s largest acquisition to date.

“When you put the two entities together, that’s the value for us,” Mark Jenkins, CPPIB’s global head of private investments, told Bloomberg. “The comparative advantage Antares has is that you have long-term relationships with the middle-market sponsors, and that’s important.”

The GE-CPPIB transaction is expected to close in the third quarter of this year, with Antares remaining as a standalone independent business following the handover.

Credit rating agency Moody’s last week declared that the deal was a negative move for CPPIB because it “further concentrates the pension plan’s portfolio in less-liquid alternative investments that are difficult to evaluate in terms of both price and risk.” CPPIB’s alternatives exposure is the third highest of the major Canadian investors, while OMERS’ is the highest, Moody’s said.

Related Content: Pension Giant Buys GE Unit