CalPERS Sets Sights On Additional Minority Stakes

California Public Employees’ Retirement System isn’t done taking minority investments in private equity firms just yet.

The deep-pocketed limited partner, with assets of $260 billion, paid $275 million for its 9.9 percent stake in Silver Lake, a source close to the deal told Buyouts. (Neither CalPERS nor Silver Lake would confirm the dollar amount.) CalPERS is currently mulling similar transactions, said a different source familiar with the LP. CalPERS spokesman Mark McKinley acknowledged that it’s a strategy the LP plans to continue. But he wouldn’t comment on brewing deals, saying only, “It’s always wise for us, when we think a firm’s going to be around for a long time and they’ve got a great record, to [take a minority stake] as opportunities present themselves.”

The investment followed CalPERS’s recent decision to hike its target allocation to private equity from 6 percent to 10 percent of its assets, a goal CalPERS will attempt to reach by the end of 2010, McKinley said. The allocation boost frees up another $10.4 billion for the asset class. “Private equity’s been a huge performer for us. Through the third quarter of 2007 we had a 12-month return of 30 percent,” McKinley said.

Silver Lake, a technology specialist based in Menlo Park, Calif., plans to use the capital infusion to boost its presence overseas and develop new funds. CalPERS receives a share of the firm’s fees and profits, a seat on the GP’s management board, and the opportunity to co-invest on deals with Silver Lake. “Technology’s a big area of interest for us. We believe that tech has really stabilized since that big dot-com bubble. And it’s a nice frontier for us,” McKinley said. The LP had a relationship with the firm well before the minority stake was on the horizon. Since 1999, CalPERS has invested more than $700 million to Silver Lake across four funds, and it plans to increase its commitments to the firm’s vehicles in the future.

In addition to the Silver Lake investments, CalPERs holds a 10 percent stake in Apollo Management LP, and 5.5 percent stake in The Carlyle Group. The LP is also reported to own stakes in Boston-based Audax Group and Thomas Weisel Partners, a San Francisco-based merchant bank. Last June, CalPERS paid $500 million for roughly 25 percent of Conversus Capital, the largest publicly traded fund of funds; it also owns less than 10 percent of the fund’s management company. The LP may have other minority stakes that it has not disclosed.

Buyout firms sell stakes in their management companies to generate liquidity for partners or for a capital infusion that allows them to expand operations. (Silver Lake plans to invest the money.) The move can also serve as a prelude to an IPO by setting a valuation for the firm’s management company—a prospect that is no doubt motivating for some LPs.

“After all, there is a symbiotic relationship between the limited partner and the PE fund manager,” said David Fann, president and CEO of PCG Asset Management, the La Jolla, Calif.-based investment management firm that counts CalPERS as a long-time client. “Public PE fund management companies are being valued on metrics such as ‘multiple of assets under management,’ ‘multiple of fee income’ that are clear derivatives of the capital commitment from limited partners. It makes sense for some larger limited partners who understand the risk to invest in those fund managers that are likely to seek public listings to augment investment return.”

That said, it may be difficult for other U.S. public pension funds to follow suit. In addition to coming up with the capital to buy minority stake investments, LPs need to have a deep bench of investment professionals to perform due diligence for such deals, and then to maintain regular communication as an involved partner after the stake is purchased. Even a sophisticated program such as the Oregon State Treasury hasn’t taken a minority stake in a buyout shop yet. “We’d consider anything if we see a good investment opportunity, but we’re a little bit short-staffed right now,” said Jay Fewel, the state’s senior equity investment officer.

Silver Lake is one of several buyout shops to sell minority stakes of late. Last year, the Chinese government paid $3 billion for a non-voting, minority stake in The Blackstone Group. The government of Abu Dhabi, through its Mubadala Development Corporation, paid $1.35 billion for a 7.5 percent stake in The Carlyle Group, and used the Abu Dhabi Investment Authority, a different arm of the government, to buy stakes in Apollo Management and Ares Management LLC.—J.P.