Some on CalPERS board raise questions about new investment model

  • Questions around structure, governance of new platform are being explored
  • Board members demand careful vetting of proposal, which would transfer power to a new board
  • Board members also raise questions around costs

California Public Employees’ Retirement System’s unveiled a new private equity platform that will bypass expensive funds, potentially securing investments in high-performing private companies at a lower cost.

But first CIO Ted Eliopoulos and staff have to convince the board that it will work.

Three members of the system’s board of administration said there are major questions around the platform, including specifics explaining how it would be managed and structured.

CalPERS staff has been tasked with shoring up major components of the proposal, which the retirement system hopes to roll out in 2019. The proposal requires board approval.

Here’s what’s known: The $354.4 billion retirement system’s board gave Eliopoulos and staff the green light to publicly explore the formation of CalPERS Direct, an outside entity that would control two separate evergreen funds for private investments.

The first would pursue investments in late-stage technology, life sciences and healthcare companies, a CalPERS news release said. The second would make long-term investments in established companies.

The new platform would be overseen by a separate, independent board. Day-to-day management would go to an outside firm or a captive investment team.

The retirement system expects to invest as much as $13 billion per year to meet its 10 percent allocation to PE.

CalPERS plans to launch the new entity next year, after it’s approved by the board. CalPERS Direct would invest alongside the system’s existing PE platform, which commits to funds managed by firms like Blackstone Group and CVC Capital Partners.

The entity would give CalPERS greater control over its private equity portfolio, Eliopoulos told Bloomberg Thursday.

“[With] the size and the amount of the capital that’s pouring into these relationships, we’re not able to build a $50 billion to $60 billion portfolio solely through the traditional general partnerships,” he said.

“These alternate vehicles we’re announcing today are going to have evergreen, indefinite investment horizons, and that will allow us to match our liability stream much more directly.”

Critical details

It’s unclear how the CalPERS Direct board would be assembled, and what if any interaction it would have with the existing board of administration, three board members told Buyouts.

There are also questions as to how CalPERS Direct would be staffed and compensated. Contracting the management of CalPERS Direct to an outside firm like BlackRock or Goldman Sachs might push costs beyond what’s reasonable or politically feasible, multiple sources said.

CalPERS has been exploring an alternative approach to its private equity program over the past year. In January, the retirement system disclosed that BlackRock and Goldman Sachs were among the six firms to submit proposals on how to manage the $27 billion PE program.

The purpose of the CalPERS Direct public rollout was to bring the long-discussed proposal into the public sphere, multiple sources said.

“We gave the staff the authority to get it out there [in the public],” board member Richard Costigan told Buyouts. “We want it to be scrutinized, we want questions to be raised, and we want it to be transparent as we get it out there.”

The retirement system is beginning to explore the formation of a new board and the CalPERS Direct management team with industry professionals, the news release said.

California State Controller and CalPERS Board Member Betty Yee said CalPERS Direct, while innovative in concept, must be carefully vetted.

One of the board’s newest members, Margaret Brown, released a statement on Thursday signaling her skepticism about the proposal.

“The analysis to date has been quite thin,” Brown’s news release said. “While Ms. Brown invites CalPERS staff to build on this outline plan with robust supporting evidence, no responsible fiduciary could support the plan in its current state of development.”

Further complicating matters is the pending departure of Eliopoulos, who recently said he’d be leaving the Sacramento-based retirement system for the East Coast at year’s end, two sources said.

CalPERS has yet to replace its former private equity chief, Real Desrochers, who took a position with CITIC Private Equity Funds ManagementBuyouts has reported.

Some board members are optimistic. The statement announcing CalPERS Direct included comments from Investment Committee Chair Henry Jones, who said CalPERS Direct aligns with CalPERS’s long-term liabilities as a public pension fund.

“If we find out we can’t go through with it, there’s no harm to the beneficiaries,” Costigan said. “We have to explore it.”