The California Public Employees’ Retirement System (CalPERS) has taken its investment strategy to a whole new level. Not only did CalPERS, the largest public employee pension fund with over $140 billion in assets, commit $250 million to Yucaipa American Funds> (YAF) – it also invested $35 million into the holding company to take an undisclosed minority stake.
If all goes as planned next year, CalPERS, which provides retirement and health benefits to more than 1.2 million state and local public employees and their families, expects to infuse an additional $275 million into Los Angeles-based YAF when its raises its next fund. However, CalPERS is reserving the right to walk away from the fund without investing the additional cash if the pension fund is unhappy with Yucaipa’s investment performance at that point.
“We will look at the progress of this fund then make a decision about our next investment with them,” said Brad Pacheco, a CalPERS spokesman.
Other than tapping CalPERS, YAF is looking to raise additional capital from Taft-Hartley labor funds, as well as public pensions.
According to Air Swiller, a spokesman for Yucaipa, YAF is targeting Taft-Hartley funds because they are an underrepresented source of capital for the private equity industry. Taft-Hartley controls more than $400 billion in assets, but invest only one-tenth of one percent in private equity, Swiller explained.
Considering YAF launched its fund-raising effort in the beginning of the year, it is not surprising that no investments have been made out of the fund yet. However, when ready, YAF is expected to focus on companies that maintain strong corporate governance practices and are sensitive to the interests of their employees. YAF has no set industry focus, target amount or close date for this fund, Swiller said.
While taking a minority stake in a company and gaining a degree of control as a limited partner is not brand new to CalPERS, it is not exactly old either. In the past couple of years, CalPERS has taken a 5% stake in The Carlyle Group, a 10% stake in Thomas Weisel Partners, and undisclosed stakes in New Mountain Capital, Audax Group, Solera Capital, and Texas Pacific Group’s TPG Ventures.
“The idea is to form a relationship with an established investment team, commit dollars to funds, but also take an equity stake in the company so we can benefit from its growth,” Pacheco said. “Yucaipa has been around for some time, and they have identified a unique opportunity in working with Taft Hartley. We are happy to be working with them.”