The California Public Employees’ Retirement System recently received a commissioned review of its alternative investment management program. Results and recommendations were presented during an Oct. 17 meeting of the CalPERS investment committee, and will be evaluated over the next few months.
CalPERS had retained Portland, Ore.-based Pension Consulting Alliance to conduct the review, which was designed as a follow-up to the “Investor of Choice” report issued by McKinsey & Co. five years ago. PCA lauded CalPERS for usually producing above-average returns, as compared to the Wilshire top 2500 or Thomson Venture Economics’ All Private Equity indices. It also reaffirmed the Investor of Choice plan, but made several recommendations in order to help CalPERS reach such lofty status.
Most notable was PCA’s assessment that internal CalPERS staff is overworked. The Investor of Choice review recommended that CalPERS professionals manage a total of 30 active general partner relationships, with the rest being outsourced to captive funds-of-funds or other third-party managers.
CalPERS staff currently is managing 135 active GP relationships (through $23.1 billion for 450 active commitments), however, so PCA recommended that CalPERS outsource responsibility for more of its small-to medium-sized partnerships. It also recommended that at least two CalPERS staffers be on hand in Sacramento, and also that the system should hire an outside consultant to oversee troubled partnerships.
In terms of existing relationships, PCA recommended that CalPERS maintain its current roster of external advisors and consultants, including Hamilton Lane, Pacific Corporate Group, Probitas Partners, LP Capital Advisors, KPMG, Sextant Search Partners, Thomas Weisel, PrivateEdge Group and Bloomquist & Co. It also recommended that CalPERS form a fourth venture capital investment vehicle with Wellesley, Mass.-based Grove Street Advisors.
Finally, the report noted that CalPERS is forced to walk a tightrope in terms of GP performance disclosure, and that it did not receive requested fund allocations from 15 firms that cited FOIA requirements as the primary impediment.
CalPERS has approximately $196 billion under management and approximately $8.5 billion in alternative investments and private equity. Among others, it is a limited partner in funds managed by firms such as Austin Ventures, Blackstone Group, the Carlyle Group, Coller Capital, Lexington Partners, Prism Venture Partners and U.S. Venture Partners. As the largest public employee pension system in the U.S., CalPERS administers retirement and health benefits on to more than 2,500 California public employers.