CalPERS weighs bringing in UC Regents in creation of separate PE entity

  • Partnership with UC Regents among ideas addressed in closed session
  • Status of any outside partnership, including with BlackRock, remains unclear
  • Hamilton Lane conducts review of CalPERS’s $25.8 bln PE program

California Public Employees’ Retirement System is considering partnering with other institutions like UC Board of Regents in its construction of separate entities to invest in private equity, a document obtained by Buyouts shows.

The document, from the closed session of its Sept. 18 board meeting, sketches a number of ideas for creating separate PE investment entities. Among those are “partnerships with others like UC Regents,” according to the document.

Several of the other ideas have been widely covered or discussed openly during the board’s open session, including the creation of a long-term investment platform and/or an outside operating company similar to CalPERS’s outside real estate venture, CenterPoint Properties.

The status of any of CalPERS’s potential outside ventures or partnerships remains unclear.

Earlier this year, Bloomberg reported CalPERS was exploring handing over some of its private equity program to BlackRock. Former Canada Pension Plan Investment Board President and CEO Mark Wiseman, who now chairs BlackRock’s global active equities team, participated in a panel of PE experts at CalPERS’s July board meeting.

“Regarding private equity in general, no decisions have been made. Staff are still looking at models to bring back to the board,” said CalPERS Spokeswoman Megan White. White declined to comment on items presented in closed session.

UC Regents Director of Private Equity John Beil did not respond to a request for comment.

New approaches

CalPERS is exploring several different avenues to revamp its PE program, which suffered its share of scandal, staff turnover and questions relating to fees, expenses and transparency.

Earlier this year, CalPERS commissioned Hamilton Lane to review its $25.8 billion private equity program and deliver recommendations, which included increasing its annual commitment pacing to $5 billion to $6 billion per year. Hamilton Lane also encouraged the retirement system develop rules to govern its relationships with its most important outside fund managers, according to excerpts obtained by Buyouts.

“A number of successful GPs have told us that we’ve become too unpredictable to do business with,” said Investment Director John Cole, during a July presentation. GPs are also cutting back the amounts they’re willing to allocate to CalPERS within their funds, he said.

Another excerpt from the Hamilton Lane review, which CalPERS made public at its off-site board meeting in July, established several strengths and weaknesses associated with the private equity program — as well as factors that could help or hinder its long-term development

Several factors, such as size and brand, qualify as both strengths and weaknesses to the program (see chart).

Hamilton Lane report on CalPERS, June 2017
Strengths Weaknesses Opportunities Threats
Brand Brand Brand Headline Risk
Size Size Size Size
Knowledge Relationships Relationships Team Retention
Thought Leader Legacy Portfolio Long-term Ownership Legacy Portfolio
Program Flexibility Governance Platform Consistency
Transparency California Regulations
Spin-out entity Competition
Source: CalPERS

“It is a strength in presence and profile to be large. It is a weakness to have the pressure to invest large amounts of capital continuously, and with little negotiating leverage, in a seller’s market,” Cole said during the July presentation.

The pressure to invest large amounts of capital has dragged down returns, Board Member JJ Jelincic told Buyouts.

“We are so big and so diversified that we are essentially sort of an index. And if you’re index, you’re going to basically be the median,” said Jelincic, whose term as a board member will expire in mid-January.

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