CalPERS diversifies PE ranks despite challenges posed by state law

  • Prop. 209 bars gender, race-based criteria for selection
  • CalPERS emerging manager program targets smaller firms
  • “CalPERS/CalSTRS driving level of diversity, which is quite grand”: portfolio manager

California Public Employees’ Retirement System’s emerging-manager program is increasingly targeting investments with women- and minority-owned private equity firms, even though it’s not an official goal of the program, Portfolio Manager John Greenwood said at Buyouts’ Emerging Manager Connect West Thursday.

“The State of California and CalPERS/CalSTRS are driving a level of diversity, which is quite grand,” he said.

Emerging-manager programs sponsored by CalPERS and California State Teachers’ Retirement System don’t explicitly mandate diversity, unlike similar programs at Illinois and New York retirement systems. Both institutions are subject to a California law that prohibits investment decisions based on race or gender, presenting challenges as diversity became a priority for both institutions.

California’s Proposition 209, approved by more than half the state’s voters in 1996, prevents state agencies from creating race- or gender-based criteria for hiring contractors or investment managers.

CalSTRS CIO Christopher Ailman, speaking at CalPERS & CalSTRS Diversity Forum in Sacramento on May 10, called the law “cumbersome.” CalPERS CIO Ted Eliopoulos said at that event that limited partners are more often asking managers about the racial and gender makeups of their investment teams.

In recent years, CalPERS has dedicated considerable resources to finding firms raising their first or second funds, effectively diversifying its pool of managers without issuing requests for proposals that would have violated Prop. 209’s restrictions.

Less-established managers are more likely to be led by women and minorities. In effect, the emerging-manager program enables CalPERS to diversify its fund-manager group without formally establishing diversity as a priority, Greenwood said.

“I can see it growing,” he said, adding that he was encouraged by what he’d heard at the diversity event at which Ailman and Eliopoulos spoke earlier in the week.

The commitments CalPERS places with emerging managers could blossom into more significant relationships. In 2015, CalPERS introduced an “Emerging Manager Transition Plan” designed to maintain its relationships with managers that had outgrown its emerging-manager program but were too small to take on the $150 million allocations CalPERS places with larger managers. The emerging-manager program tends to allocate around $10 million or $15 million per commitment.

Another important thing with emerging managers, Greenwood said, is that “we have a large portfolio at CalPERS, and some of those managers are going to fall away over time, and we have to replace those. So emerging managers are very important in that regard.”

Action Item: More about CalPERS’s emerging-manager program: