CalPERS Ending $1B In-State Program

Pension System: California Public Employees’ Retirement System

Assets Managed: $239 Billion (Aug. 9, 2012)

Private Equity Assets Managed: $34 Billion

Private Equity Target Allocation: 14%

Chief Investment Officer: Joe Dear

The California Public Employees’ Retirement System has decided to wind down its California Initiative, a $1 billion program launched in 2001 to invest in companies that are based in some of the state’s most economically disadvantaged areas. The $237 billion pension said the program, which it plans to phase out over five years, “has not met CalPERS investment return expectations.”

The program is one of several that CalPERS uses to oversee in-state investments, and there are no plans at the moment to phase out the other programs. Brad Pacheco, a CalPERS spokesman, said that across all asset classes, the pension has more than $23 billion invested in California, including $3.8 billion in private equity investments that are made in companies headquartered in California.

While the program’s primary goal was to generate returns that met or exceeded industry benchmarks, the program’s “ancillary objective” was to “promote economic development in underserved California markets.” Abandoning the program may lead to increasing pressure for CalPERS to ratchet up investments within the economically and fiscally troubled state.

In phasing out the California Initiative, CalPERS said that ongoing investments “would need to be carefully evaluated relative to the benefits gained before any additional capital is committed.”

In materials made available ahead of an investment committee meeting on Aug. 13, CalPERS pointed out that the first $475 million committed to the program in 2001—Phase I, which invested in nine managers—returned an IRR of -6.4 percent and a 0.7x return multiple if the pool were to be measured without its one stellar investment in the GCP California Fund, which had a 94 percent IRR and which CalPERS said was “most likely not repeatable.”  If that GCP California Fund were excluded from return totals, Phase I would have fallen dramatically short of its 14.7 percent return benchmark.

The second $560 million invested under the program—Phase II—has performed slightly better. Phase II, which was launched in 2006 and was managed by Hamilton Lane, returned a net IRR of 0.9 percent and a 1x return multiple.  But that still fell short of the investment’s 6.9 percent return benchmark. That pool made 10 investments.