CalPERS seeks green light to set up captive PE funds

  • Wants to signal seriousness about new vehicles
  • Approval would enable recruitment of leaders
  • No timeline for implementation of the plan set yet

California Public Employees’ Retirement System will seek permission to proceed with the creation of two direct private equity funds, scheduling an initial vote on the concept for its March 18 investment committee meeting.

The plan, discussed for nearly a year, would create a new CalPERS-controlled organization of two new funds with the pension system as sole LP.

One fund, Innovation, would invest in late-stage venture and growth investments in tech, life sciences and healthcare. The other, Horizon, would focus on long-hold opportunities.

CalPERS currently plans to commit $20 billion to the new investment vehicles, if they are approved.

CalPERS needs a show of support from its investment committee to hire potential leaders for the new funds, a memo signed by CIO Ben Meng and Investment Director John Cole shows.

“Such a demonstration of intent should [help identify] a pipeline of potential partners,” the memo said.

The vote would allow CalPERS to recruit leaders but would not be a full green light for the new funds, CalPERS’s recommendation memo says. The staff would not give money to the new investment vehicles until it delivers a “prudent-person opinion” to the investment committee, the documents say.

CalPERS would also seek the investment committee’s approval for any deviations from the plan as it is currently proposed.

The system had used the term CalPERS Direct to describe the new PE funds but has backed off that label, instead calling the new funds Pillar Three and Pillar Four.

The funds would be part of a four-pillar structure that also includes an emphasis on traditional PE partnerships and a focus on emerging managers.

CalPERS did not provide new details about the structure of the new organization or its timeline for implementation.

Many details about how the new funds would work have been discussed in closed session. But board members have raised questions about the governance of the new funds, as well as the costs and transparency of the new organization.

“We don’t have all the governance stuff to look at,” Board Member David Miller said at the February meeting. “So the devil’s in the details there, and I think it might take a little longer before we get to a point where I’m comfortable with a decision there.”

The approval request comes at a time of significant turnover at CalPERS.

Meng started at CalPERS in January, as did three new board members. The March investment committee meeting will be overseen by Bill Slaton, who was named investment-committee chair just a month ago.

And in the absence of a long-term head of PE investing, the CalPERS staffer most frequently called upon to explain the four-pillars model has been Cole, a portfolio manager in the CalPERS global equities division.

In addition to recruiting, the approval could lead to additional expenses related to staff time and travel to assess the business model, identify potential partners, conduct due diligence and negotiate contracts, according to the approval request.

Creating the new funds would also require up-front spending to set up an operating budget for the vehicles in lieu of typical partnership management fees.

CalPERS said it needs the funds to maintain exposure to PE at an appropriate scale, without overdiversifying by spreading its money among too many GPs.

Action Item: View CalPERS’s latest summary of the four pillars model: