CalPERS Cuts Ties With Centinela

Pension: California Public Employees’ Retirement System

Assets Managed: $242 Billion (Sept. 12, 2012)

PE Assets: $34 Billion (June 30, 2012)

PE Allocation (Target): 14% (14%)

Chief Investment Officer: Joe Dear

Because of the severed Centinela contract, management of the two customized funds of funds—Capital Link Funds I and II—also will be turned over to Credit Suisse.

“We have had to make some tough decisions about our partners to improve the long-term performance of our fund,” said Pacheco, who suggested that the removal of Centinela was part of CalPERS’s recent effort to reduce the number of outside managers it deals with.

Calls to two of Centinela’s partners, Robert Taylor and Christopher Farrington, were not returned. Both Taylor and Farrington are black, while a third partner, Fidel Vargas, is Latino.

Earlier this year, the firm filed a complaint alleging racial bias against CalPERS with the California Victim Compensation and Government Claims Board, which handles complaints against state agencies. The board did not rule in Centinela’s favor, but suggested that the firm pursue its claim in court. It has not yet done so, and there has been no indication that it will.

CalPERS recently said it was reexamining its various emerging manager programs since some of them had delivered lackluster performance. As part of that announcement, CalPERS said it was looking to end another emerging manager fund of funds, the $1 billion in-state California Initiative Program, which the pension said “has not met CalPERS investment return expectations.”

The two Capital Link funds have fared better than the California Initiative Program, but not markedly so. The $500 million Capital Link Fund I, which Centinela established in 2007, returned an IRR of 7.2 percent, while its successor fund, the 2008 vintage Capital Link Fund II, also launched with $500 million, has returned just 0.6 percent.

Centinela’s complaint alleged that CalPERS verbally promised a contract for a third Capital Link fund to Centinela, but would only grant that contract if the firm fired one of its founding partners, Cesar Baez. The complaint alleges that CalPERS was concerned with Baez’s ties to a certain placement agent who was under investigation.

While the complaint did not say his name explicitly, that placement agent was almost surely Alfred Villalobos, who is currently under investigation, along with Federico Buenrostro, a former chief of CalPERS, for their roles in an alleged pay-to-play scheme that steered millions of dollars in CalPERS money to preferred investment managers in exchange for bribes and gifts.

After Baez was dismissed, the complaint said, CalPERS failed to come through on its promise to award the contract to Centinela. In not choosing Centinela, the firm claimed both racial discrimination and breach of contract. CalPERS would not discuss Centinela’s accusation of discrimination.