CalPERS PE stakes under microscope

The California Public Employees’ Retirement System sold $2.1 billion of private equity assets in late 2007 in the secondary market, according to recently released private equity performance data.

The data cover fund data through the second quarter of 2008.

It is unclear how many funds CalPERS unloaded on the secondary market. Some 96 funds listed in the state pension fund’s prior report are missing from the most recent performance data, according to PE Week research. The missing funds include seven funds raised in 2005 and 10 funds raised in 2004.

A CalPERS spokesman confirms that most of the missing funds were sold in secondary sales. CalPERS said there were 80 partnerships in this portfolio and 60 different general partnership relationships, diversified across venture capital, buyouts and other funds.

London-based private equity research firm Preqin, which has been analyzing historical sales of the LP’s private equity assets, said in a press release this month that the net asset value of funds sold equates to 9% of CalPERS’ overall portfolio, and calculates the remaining value of its private equity portfolio at $21.5 billion.

Preqin said that the majority of fund interests sold reside in the third and bottom quartiles of Preqin’s private equity benchmarks. However, some of the sold funds did include some top performing funds.

The best performing fund interest sold was in Doughty Hanson Fund II, a buyout fund of vintage 1995 with a net IRR of 46.3%, Preqin said. London-based Doughty Hanson & Co. raised $700 million for fund II, which closed in 1995. CalPERS, which committed $50 million to the fund, reported on June 30 that its cash in value was more than $44 million and its cash out was nearly $85 million.

Preqin said the worst performing fund interest sold was in American River Ventures I, a 2001 vintage fund with net IRR of negative 27.7 percent. Roseville, Calif.-based American River Ventures raised $100 million for the fund, which closed in 2001. CalPERS committed $15 million to the fund. Its cash in value ws $12 million and its cash out was about $19,000, as of June 30.

Preqin said the sales mainly included venture funds of vintages 2000 and 2001.

CalPERS didn’t confirm Preqin’s calculations.

For a detailed look, here is a spreadsheet comparing CalPERS’ private equity fund holdings between the 12/31/2007 report and the 6/30/2007 report. Funds from the old report are in red, while funds from the new report are in black. If you see a red one without a corresponding black one, that means it’s no longer a CalPERS holding.

The state pension fund said it couldn’t specify how much more it gained from the sale last year, when the market was peaking, than if it had tried to sell the stakes today. The initial sale of the $2.1 billion assets was in the third quarter of 2007, when the Dow Jones Industrial Average ranged between 13,000 to 14,000.

Leon Shahinian, senior investment officer at CalPERS private equity program, said via an email from CalPERS spokesman: “In today’s market, we would have had hundreds of millions in losses.”

The state pension fund said that its strategy of unloading the funds on the secondary market dated back to late 2005, when its Alternative Investment Management (AIM) program presented a strategic plan to the CalPERS board to lessen the administrative burden of having so many funds to manage, and to optimize long-term private equity performance.

In 2006, it hired UBS Investment Bank to scrub its private equity portfolio and develop a list to sell.

The secondary market for private equity has heated up recently as equity markets have slid, meaning pension fund allocations to private equity have grown proportionally and now need to be rebalanced.

Last week, Washington Mutual Inc., the holding company that owned Washington Mutual Savings Bank prior to the FDIC seizure in September, filed documents in bankruptcy court outlining its plans to sell its interests in 10 venture capital funds. Arch Venture Partners, FT Ventures, Madrona Venture Group and Maveron are among the funds supported by WaMu, according to a bankruptcy court filing.

Meanwhile, an estimated $130 billion worth of private equity commitments from banks, pension funds and endowments are being put on the market, looking for a secondary buyer, according to an analysis by San Francisco-based funds of funds advisor Paul Capital.

Prices are falling due to the imbalance between the supply of private equity assets and the ability of secondary funds to fill that demand. “There’s a huge supply-demand imbalance here,” says David deWeese, a partner at Paul Capital.

A version of this story previously appeared in Reuters DealZone blog. PE Week staff contributed to this story.