CalPERS Portfolio Under Review, Clock Ticking

The California Public Employees’ Retirement System (CalPERS) is undergoing a strategic review of its Alternative Investment Management program, with final results and recommendations expected sometime this fall.

Strategic reviews of institutional investment programs are hardly uncommon, but CalPERS holds a special place as the world’s second-largest private equity investor. It managed approximately $21.4 billion of active commitments to 412 different funds as of Sept. 30, 2004, and is a top client for consultancies like Grove Street Advisors, Pacific Corporate Group, Hamilton Lane and LP Capital Advisors. As such, any large-scale strategic changes could have wide-ranging repercussions.

For perspective, one need only look back five years, when CalPERS retained McKinsey & Co. to conduct what would become known as the “Investor of Choice” review. The pension system had essentially professionalized its private equity program in the mid-1990s, but still ceded dominant buy-side presence to Ivy League endowments and private foundations. McKinsey, however, recommended that CalPERS dramatically increase its exposure and investment breadth, including a heralded $500 million program for biotech-focused venture capital funds. Looking back, one private equity market analyst argued that the McKinsey report “helped turn CalPERS into the 800-pound gorilla” that it is today.

It is unknown if the new report will be as momentous, largely because its ongoing findings are being kept very close to the vest. Donn Cox, a managing director with LP Capital Advisors and a longtime consultant to CalPERS, said: “This seems like a refresh of what [CalPERS] did with McKinsey, but they’ve been very closed-lipped about it… we haven’t been privy to what they’re thinking.”

What is known, however, is that the review will not be completed on time. Minutes from a February CalPERS Investment Committee meeting indicate that the Portland, Ore.-based Pension Consulting Alliance had been retained to conduct the review, with final results and non-binding recommendations to be presented by August. But Mike Moy, a managing director with PCA, said that “it certainly won’t be [presented] in August,” and confirmed that early fall is a more likely timeframe. Moy is in charge of conducting interviews for the review.

The delay is unlikely to alter PCA’s findings, but could cause some timing problems for some of CalPERS’ discretionary advisors. Grove Street Advisors, for example, is in short order expected to run out of dry powder for its California Emerging Ventures program, which serves as the primary vehicle for committing to venture capital funds (once anticipated follow-on commitments are taken into account). The program could certainly be renewed by the CalPERS Investment Committee, but the system does not plan to take any such actions until the strategic review is completed.