CalSTRS Names Four Gatekeepers

Nine months after announcing it would split the role of its consultant into separate gatekeeper and strategist functions, the California State Teachers’ Retirement System has named four gatekeepers and a single finalist for the strategist role to manage its $4.4 billion alternative investment portfolio.

Ernst & Young Corporate Finance in Los Angeles, Houlihan Lokey Howard & Zukin Financial Advisors of Los Angeles, KPMG in San Francisco and Standard & Poor’s Corporate Value Consulting in San Francisco will take on the gatekeeper role. They are to screen investment opportunities, perform due diligence and advise the Sacramento-based CalSTRS staff. Representatives from McKinsey & Co.’s San Francisco office will testify before the state pension fund’s investment committee next week before being named to the strategy consulting role. If McKinsey & Co. qualifies, the firm will be responsible for industry and market analysis, monitoring fund performance and reviewing investment policies. Another finalist withdrew its name from consideration earlier this month.

None of the new contracts are final and all are currently being negotiated with the retirement system. Program advisors will be paid on an as-needed project basis.

Pathway Capital Management (PCM) of Irvine currently plays both roles. Its contract has expired, but it will maintain its current role until all the new contracts are hammered out.

CalSTRS’ investment committee decided in November to split the gatekeeper and consultant roles, one month after voting to increase its alternative asset allocation to 8% of its $100 billion investment portfolio. An RFP was issued in December; applications were due in February. While the decision to split the roles was made as PCM’s contract came up for renewal, it also was meant to circumvent any potential conflict of interest issues – when the consultant might be called on to review its own performance.

The proposal raised budgetary concerns almost immediately. While CalSTRS pays out $300,000 to $500,000 to PCM annually for its consultant services and $1.5 million annually for its gatekeeping functions, the cost of a new contract – a three-year contract with two one-year extensions – could cost the plan between $1 million and $3 million annually.

Currently, the system’s private equity portfolio is worth about $4.4 billion. The new asset allocation plan calls for a 5% allocation to private equity by the end of fiscal year 2002, climbing one percentage point each year to hit its long-term goal of 8% by 2005.