A big boost to the new manager ecosystem

There was a big story out of California Public Employees’ Retirement System this week: the nation’s largest public pension system is pledging $1 billion to TPG and GCM Grosvenor to back emerging and diverse managers. It is committing $500 million to each of the firms via TPG’s NEXT fund and Grosvenor’s Elevate strategy. Read more here on Buyouts.

Some sources viewed the commitment as mostly a public relations strategy, a way for CalPERS to signal that it is committed to boosting diversity in the private equity world. This is because $1 billion, for a system that manages a total of about $453 billion in assets, seems minuscule and perhaps not significant.

But $1 billion is still $1 billion, and especially for the diverse PE community, it’s at the very least a good first step.

The economics of the partnerships were not disclosed and it will be interesting to better understand the fee and carried-interest arrangements of each vehicle.

TPG’s NEXT strategy, launched last year, focuses on seeding and providing operational support to diverse managers and entrepreneurs. In 2019, TPG made a non-control investment in Harlem Capital, a prelude to its expanded NEXT strategy. Interestingly, TPG’s strategy will incorporate a secondaries component, Buyouts reported.

Last year, the firm made a strategic investment in LandSpire Group, a Black-owned real estate firm focused on investing and development in secondaries markets in the US. It also backed VamosVentures, an early-stage firm that invests in diverse-led companies.

Grosvenor, meanwhile, launched its Elevate strategy this year to seed small, emerging and diverse PE firms. It has about $17.5 billion of assets managed with small and emerging managers and about $13.6 billion of assets managed with diverse managers.

GCM is raising additional capital for the strategy, along with CalPERS’ investment, the firm said in a statement.

CalPERS has long been a booster of the emerging manager ecosystem. The system, by state law, is not allowed to make investment decisions based on race or sex. However, many new managers also happen to be diverse-led, and so, indirectly, CalPERS has been a supporter of this community for many years.

The system has been refocusing its private equity program over the past few years under the leadership of CIO Nicole Musicco. She claimed last year that CalPERS missed out on between $11 billion to $18 billion of returns over the past decade by not being more exposed to private equity.

Perhaps backing new and diverse managers is another way for the system to capture some of those missed returns.