In the span of one week, the $244 billion California Public Employees’ Retirement System dropped two bombshells, announcing that both CEO Fred Buenrostro and CIO Russell Read are leaving. But because of the size of the pension fund, the way it sets its policies, and the enormous investment returns it has generated in recent years, the exits will likely lead to few changes in the limited partner’s alternative assets strategy.
“I highly doubt their departures will have a material impact on the private equity program,” said David Fann, CEO of the private equity advisory firm PCG Asset Management in La Jolla, Calif., which has helped shape CalPERS clean tech, emerging markets and growth capital investments. “Both Fred and Russell were very conscientious to build a strong investment team,” he added.
A big reason not to expect many changes—if any at all—is that the the leadership of the LP’s Alternative Investment Management (AIM) program remains intact. That includes Leon Shahinian, AIM’s senior investment officer, as well as his deputy, JonCarlo Mark, and the rest of the 15 investment professionals who work for them. “They have a lot of experience. They’ve done exceeding well,” Fann said.
As of June 30, 2007, the AIM Partnership generated a net IRR of 14.5 percent since its inception in 1990, or $12.5 billion in profits for CalPERS.
In addition, Buenrostro and Read did not play active roles in the more minute decisions about which buyout or venture funds to back; the pair simply had too many other responsibilities, Fann said. CalPERS’s CIO, for example, oversees investments in international equity, U.S. Treasury debt, high-yield bonds, mortgage-backed securities, real estate, corporate governance, venture capital, buyout funds and hedge funds. Still, Read did help push the giant LP in new directions, particularly into emerging markets, and that legacy will remain after he leaves, Fann predicted. “I think more creative ways of thinking about private equity are now embedded in the culture,” he said.
CalPERS spokesman Brad Pacheco underscored Fann’s prediction of few changes. “CalPERS’s board is responsible for setting the asset allocation of our fund, including our private equity program. The day-to-day operations of the program are delegated to [Shahinian], so I don’t anticipate any immediate changes in our investment strategy.”
Still, Pacheco added, “until we have a new CIO on board, it is unknown if there will be any changes in the future.”
The departures could have a larger effect on CalPERS’s nascent push into infrastructure and other “inflation-linked” assets; the LP created an allocation for this sector in November. Already, CalPERS’s investments in several infrastructure projects have reportedly generated friction. According to press reports, some CalPERS board members are pushing for union employees to work on the projects, creating some gridlock and threatening to inject politics into investment decisions.
Read, who joined CalPERS two years ago from Deutsche Asset Management, has set a departure date of June 30, after which he plans to launch his own investment shop specializing in the cleantech sector. Anne Stausball, CalPERS’s chief operating officer for investments, has been named interim CIO. Buenrostro, CEO since 2002, said that he will stay on through the end of 2008; after that, his plans are unknown. No doubt the search for replacements is already on, although CalPERS has yet to hire a search firm. CalPERS’s board will formally meet May 15 to discuss next steps, including the timing of the Buenrostro’s departure.