CalPERS eyes more minority stakes

CalPERS’ stake in Silver Lake may signal more such deals

The California Public Employees’ Retirement System isn’t done making minority investments in private equity firms just yet. The deep-pocketed limted partner, with assets of $260 billion, late last year acquired a near 10% stake in Silver Lake Partners for a reported $275 million. Neither CalPERS nor Silver Lake would confirm the dollar amount.

CalPERS is currently mulling similar transactions, says a source familiar with the state pension fund. CalPERS spokesman Mark McKinley acknowledges that it is a strategy that the LP plans to continue. But he wouldn’t comment on brewing deals. “It’s always wise for us, when we think a firm’s going to be around for a long time and they’ve got a great record, to [take a minority stake] as opportunities present themselves,” he says.

In addition to Silver Lake, CalPERS holds a 10% stake in Apollo Management, and 5.5% stake in The Carlyle Group. The LP also reportedly owns stakes in Boston-based Audax Group and Thomas Weisel Partners, a San Francisco-based merchant bank. Last summer, CalPERS paid $500 million for roughly 25% of Conversus Capital, the largest publicly traded fund of funds; it also owns less than 10% of the fund’s management company. The LP may have other minority stakes that it has not disclosed.

“Technology’s a big area of interest for us. We believe that tech has really stabilized since that big dot-com bubble. And it’s a nice frontier for us,” McKinley says.

Silver Lake, a Menlo Park, Calif.-based investor in tech companies, plans to use the capital infusion to boost its presence overseas and develop new funds. CalPERS receives a share of the firm’s fees and profits, plus gains a seat on the GP’s management board, and the opportunity to co-invest on deals with Silver Lake.

The LP had a relationship with the firm well before the minority stake. Since 1999, CalPERS has commited more than $700 million to Silver Lake across four funds, and it plans to increase its commitments to the firm’s vehicles in the future.

Though Silver Lake plans to spend the infusion from CalPERS, buyout firms typically sell stakes in their management companies to generate liquidity for partners or for a capital push that allows them to expand operations. The move can also serve as a prelude to an IPO by setting a valuation for the firm’s management company, a prospect that is no doubt motivating for some LPs.

“There is a symbiotic relationship between the limited partner and the PE fund manager,” says David Fann, president and CEO of PCG Asset Management, the La Jolla, Calif.-based investment management firm that counts CalPERS as a client. “It makes sense for some larger limited partners who understand the risk to invest in those fund managers that are likely to seek public listings to augment investment return.”

However, it may be difficult for other U.S. public pension funds to follow suit. In addition to coming up with the capital to buy minority stake investments, LPs need to have a deep bench of investment professionals to perform due diligence for such deals, and then to maintain regular communication as an involved partner after the stake is purchased.

“We’d consider anything if we see a good investment opportunity, but we’re a little bit short-staffed right now,” says Jay Fewel, senior equity investment officer for the Oregon State Treasury, which hasn’t taken a minority stake in any buyout shop.

Silver Lake is one of several buyout shops to sell minority stakes of late. Last year, the Chinese government paid $3 billion for a non-voting, minority stake in The Blackstone Group.

The government of Abu Dhabi, through its Mubadala Development Corp., paid $1.35 billion for a 7.5 percent stake in The Carlyle Group, and used the Abu Dhabi Investment Authority, a different arm of the government, to buy stakes in Apollo Management and Ares Management.

The investment in Silver Lake follows a recent decision by CalPERS to hike its target allocation to private equity from 6% to 10% of its assets, a goal CalPERS will attempt to reach by the end of 2010, McKinley says.