CalPERS Invests $500M in Small VC/PE Fund

Limited partner: California Public Employees’ Retirement System (CalPERS)

Commitment: $500 million

Fund: Sacramento Private Equity Partners

Fund manager: Oak Hill Investment Management

The California Public Employees’ Retirement System (CalPERS) announced that it committed $500 million to Sacramento Private equity Partners, a fund-of-funds focused on venture capital and small middle-market private equity funds. Menlo Park, Calif.-based Oak Hill Investment Management will manage the fund.

Charles Valdes, chairman of CalPERS’ Investment Committee, explains in a statement that CalPERS’ is attempting to access smaller funds. “There’s a huge gap between the top tier and second tier performers and we have a particular need for a partner who can help us access smaller funds that can deliver upper quartile returns,” he says.

Menlo Park, Calif.-based Oak Hill Investment Management provides asset management, risk management and estate planning services to individual and institutional investors. It manages more than $7 billion in various asset classes, including public equities, hedge funds, private equity and real estate. It is one of a group of Oak Hill partnerships that each have an independent management team. Investments across all the asset classes managed by these partnerships total more than $20 billion.

The investment is the latest in an effort by the pension system to diversify its private equity holdings towards the smaller and more emerging end. Late last month, CalPERS announced it made a $400 million commitment to funds-of-funds manager Centinela Capital Partners as part of its effort to invest more capital with emerging managers (see Buyouts, Nov. 6, 2006). Centinela will make investments in private equity firms active in venture capital, expansion capital and leveraged buyouts. So far the firm has not made any commitments but CalPERS expect it will begin investing by the end of the year and commit capital over a two to four year time period.

Also as part of this same program, called The California Initiative, CalPERS announced a $500 million commitment to Hamilton Lane. Half of the $500 million will has been allocated for California-based private equity funds. The other half is earmarked for direct co-investments in California-based companies. Hamilton Lane, which has been a long-standing manager of CalPERS funds, is managing these investments from its San Francisco office. The pension system started the California Initiative in 2001 to invest in areas typically overlooked by traditional private equity investors.

Colin Blaydon, a professor at the Tuck School of Business at Dartmouth College, says that public pensions’ have developed an appetite for new managers in their quest for diversification. “One of the principles that most of the big fund are finding now is diversification,” says Blaydon. “They want to diversify among managers as well among types of funds and types of strategies.”

Blaydon says that with the era of club deals and mega-funds is changing the landscape and the concerns of diversification within limited partners. “With so many funds going into so many of the same deals, one of the concerns of the pension funds is that some of their mangers are all in the same deals and they’re not at the portfolio level getting the diversification they’re seeking. They’re going to be looking at how they can get diversification. That’s what they’re looking for new managers to bring to them.”

CalPERS has more than $220 billion in assets and is the largest pension fund in the United States. CalPERS’ AIM program had $33.1 billion committed to investment and $12.1 billion invested in the market as of the end of this past June.—M.S.