For CalPERS, Out With Old, In With New

The California Public Employees’ Retirement System this month sold stakes in roughly 60 private equity funds, mainly mid-market buyout funds, whose average age—eight years—put them in the pension fund’s “mature” category. And more CalPERS-owned stakes may be coming onto the market as the pension fund turns more attention to backing new firms.

The sell-off by the $260 billion pension fund represented one of the largest secondary deals. The buyers, a syndicate of five firms, paid between $1 billion and $1.5 billion. The syndicate includes secondary firm Lexington Partners; funds-of-funds shops HarbourVest Partners and Pantheon Partners; asset manager Oak Hill Investment Management; and Conversus Capital, a publicly traded fund of funds in the Channel Islands that is principally owned by Oak Hill and Bank of America. The identities of the 60 funds weren’t disclosed.

Conversus Capital is the only firm so far to announce its role in the completed transaction, disclosing that its piece of the CalPERS portfolio has a net asset value of $189 million, excluding $25 million in unfunded commitments. Oak Hill, which bought stakes in the same CalPERS-owned funds for both itself and for Conversus, hand-picked the holdings. They happen to be the nine oldest in the portfolio, and most tilt toward distressed investments.

In fact, each member of the five-firm acquiring syndicate selected precisely which funds it wanted, said Jamie Hale, the Oak Hill partner who led the investment for his firm. Hale called the scenario “unique,” as well as effective. Agreeing on which stakes each firm wanted in advance and how much they would pay for them made consensus, and the sale, far easier. Hale added: “I don’t know if there will be another opportunity like this, but I think you’ll see other LPs start to use secondaries as a tool to reduce load and to change the composition of their portfolios.”

CalPERS itself may turn to the secondary market again. When in 2006 it announced plans to sell off a “legacy” portfolio of older funds, the net asset value of those investments was $2 billion, with another $1 billion in unfunded commitments—more than the purchase price of what it just sold. Assuming CalPERS didn’t just hold a fire sale, more of its stakes are coming onto the market, although the pension fund is being coy about what lies ahead. “We haven’t done a secondary sale like this for some years,” said CalPERS spokesman Brad Pacheco. He added, “This is the first sale of assets that we can confirm; that’s not to say there have been or will be others.”

Meantime, as CalPERS severs ties with older vehicles, the pension is upping its commitments to new funds and fund managers. In particular, CalPERS is backing new vehicles that target the smaller end of the buyout market under what CalPERS has coined its Manager Development Program II. The strategy is to back emerging managers with assets of less than $2 billion.

Philadelphia-based FIS Group, a 12-year-old funds-of-funds manager that’s specialized in backing emerging managers for 12 years, received the program’s first commitment, totaling $350 million. FIS has nine funds in its current lineup, including three African-American owned firms and two owned by women. CalPERS also committed $200 million to 10-year-old money management firm Redwood Investment Management of Stamford, Conn. Its president, Andrew Hanson, launched the firm after nine years with the New York-based asset manager Lepercq de Neuflize & Co.