CalPERS, Pressed For Cash, Juggles Capital Calls

Everyone can benefit from budget planning, especially in this economy. But the fact that the nation’s largest pension fund, the California Public Employees’ Retirement System, is reaching out to general partners to stagger their capital calls shows just how tight things are getting.

“We called the [private equity] partners for our planning purposes, and we are coordinating [the] timing of those [capital] calls with them,” Patricia Macht, CalPERS spokesperson, told Buyouts. The Wall Street Journal has also reported that the pension fund has been selling stock in public companies in recent weeks to boost its cash on hand to help meet capital calls. Macht said, “We don’t comment on specific investment transactions, except to say that in down markets, we manage our cash as appropriate for the situation.”

It’s unclear exactly how general partners might respond to requests to delay capital calls, since they typically draw down capital only when they have deals in place, limiting their flexibility. Taking out bridge loans would be an option, but making such accommodations for one limited partner could spark requests from others. So how has CalPERS, whose investment portfolio stood at $233.4 billion as of Aug. 31, ended up in this position?

During the first half of 2008, the LP contributed much more to its alternative investment management program than it did in the first six months of 2007, yet its flow of distributions fell. According to a report released at an investment committee meeting in October, the AIM program saw draw-downs of $5.1 billion in the first half of 2008, up markedly from $3.1 billion for the same period in 2007. But first-half 2008 distributions slipped to $2.3 billion, off from $2.5 billion in the same period last year. Add in the fact that year-to-date returns for the portfolio as a whole dropped to negative 2.1 percent on a net basis as of Aug. 31, and it’s not a stretch to say some careful cash management seems to be in order.

Selling public equities, while tempting because of its relative ease, can create other problems for LPs by exacerbating the denominator effect, which refers to the overallocation to private equity that many institutions are now experiencing because the values of their public holdings have taken such huge hits this year. Most major stock indices across the globe are down about 40 percent since the start of 2008.

“Many LPs are reducing public equity exposure for both diversification reasons and due to capital calls,” said Dan Vene of C.P. Eaton Partners, a placement agent based in Rowayton, Conn. “With the public markets down so much, and very few, if any, distributions from existing private equity managers, almost all major plans are finding themselves overallocated by a few points.”

Another source of liquidity that investors are testing is the secondary market. The endowments for Harvard University and Duke University have shown up there in recent weeks, looking to sell large swathes of fund stakes, although sources say the prices offered for LP interests today may prevent deals.

“More endowments, foundations and pensions of all sizes than I would ever have predicted are scrambling to figure out what they need to sell to meet capital calls,” said Tom Danis of RCP Advisors, a Chicago-based fund-of-funds manager. “Many are going to be looking at secondary market transactions to enable them to garner some liquidity, both to meet existing obligations and to try to take advantage of opportunities in the next couple vintage years.”