CalPERS CIO’s resignation comes in the midst of private equity overhaul

Private equity will “remain a priority” after the impending departure of California Public Employees’ Retirement System CIO Nicole Musicco, whose tenure was marked by her planned overhaul of the asset class.

Musicco will step down at the end of September after serving a little more than a year as CIO, according to a CalPERS press release issued Friday. Much of her tenure focused on major changes to the system’s private equity portfolio after a “lost decade” of underallocating to the asset class.

“The work of the CalPERS investment team in regards to private equity will remain a priority in providing the returns needed to meet our obligations to California’s public servants,” a spokesperson said.

Most other sources contacted about Musicco’s departure either declined to comment or did not respond by press time about what her departure would mean for CalPERS’s private equity program – or the market as a whole, considering the system’s massive size and the ambitiousness of its strategy.

According to the release, Musicco’s decision was caused by her frequent travel between California and Toronto to care for family members.

However, the CIO position at the nation’s largest retirement system has a rapid turnover rate, a source told Buyouts. “The job is very difficult given the requirement to satisfy many stakeholders, along with the public spotlight on the plan given its size and prominence.”

A lost decade

Last September, Musicco and her investment staff led a board presentation that outlined the need for CalPERS to revamp its private equity program. She described the years between 2009 and 2018 as a “lost decade” where the system’s $2.7 billion in average annual commitments cost returns between $11 billion and $18 billion.

At the board meeting, Musicco stressed that CalPERS still remained underallocated to private equity, as it allocated 12 percent, below its 13 percent target. Due to the system’s mammoth size, it would take an average of $15 billion in commitments to reach the target, she said.

Investment staff have showed their eagerness to meet this target. In the first three months of 2023, CalPERS made more than $6 billion in private equity commitments, according to board documents released in advance of the system’s September 18 investment committee meeting. Buyouts reviewed the documents.

However, liquidity has emerged as a concern for the system’s private equity portfolio. Board documents show that CalPERS committed $2 billion more than it received in the second quarter of 2023.

Key hires

Perhaps the most significant change Musicco made was key hires to build her investment team.

This year, CalPERS appointed Daniel Booth as the deputy chief investment officer for private markets, a newly created position that has oversight over the private equity, real assets and private debt asset classes.

Booth came from the United Kingdom Infrastructure Bank, where as a senior adviser he developed strategies to help the British government’s net-zero agenda. This was a sign of the importance of climate and other ESG factors play in CalPERS’s investment decisions.

The system also named Anton Orlich to lead its private equity program – later redubbed the growth and innovation program – after poaching him from Kaiser Permanente. Orlich boosted Kaiser Permanente’s private equity portfolio from $6 billion in net assets in 2019 to $33 billion at the end of 2021.

Emerging managers

Musicco also embarked on a strategy to fuel the emerging manager ecosystem.

CalPERS committed $500 million each to new platforms managed by TPG and GCM Grosvenor dedicated to emerging managers, a category that data suggests traditionally outperforms large, established firms. The TPG and GCM Grosvenor platforms do more than just make commitments to new managers – both can also take GP ownership stakes, which may boost returns.

The National Association of Investment Companies, which represents diverse-owned alternative investment funds, touted the support CalPERS’s emerging managers program would bring to promote diversity in the market.

Earlier this week, Musicco and NAIC president Robert Greene appeared on a webcast together to discuss CalPERS’ goals, asset class strategies and further details about the GCM Grosvenor and TPG emerging managing platforms.

Other directions

CalPERS also indicated its interest in direct investing and lending under Musicco’s lead.

Last year, Musicco developed a process for investment staff to present direct investment ideas up the chain of command. The final decision would come from a newly created internal committee that would consider the direct opportunity, with Musicco having veto power.

This past March, she also said the system could take advantage of the collapse of Silicon Valley Bank by increasing its focus on direct lending. “The word is out that we can be a strategic partner and agile in providing solutions for balance sheet restructuring or a provider of patient, long-term capital,” Musicco said.

CalPERS also changed policies that would allow the system to participate in co-investments with institutional investors it does not partner with. “Right now, if a Canadian pension plan calls and asks us to get into a program with them, they aren’t a GP. Practically speaking, that means we don’t have the opportunity to make this investment,” investment director Amy Deming said last September.

The CalPERS board also approved changes that increased the dollar amount of primary and secondaries commitments staff could make without needing investment committee approval.

Similar changes were also made that gave more flexibility to investment staff when exploring a sale of the portfolio on the secondaries market.