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CalSTRS in the red with green portfolio

  • Most PE, VC investments held at or below cost
  • $188 bln pension a leader for green investment
  • Outlook could improve as regulations, markets shift

The California State Teachers’ Retirement System is a major investor in clean energy and technology, and the $188 billion pension is considered a leader in adopting environmentally friendly strategies for its portfolio.

Unfortunately, there’s a hitch. CalSTRS’ portfolio of private clean energy and technology investments has failed to perform. As of March 31, CalSTRS held virtually the entirety of its clean energy and tech portfolio at or below cost.

CalSTRS values its green portfolio of equity, infrastructure and private equity at more than $1.5 billion. Close to $700 million of that amount has been committed to buyout and venture capital funds and co-investment, very little of which generated meaningful returns.

Of the nine funds in the green portfolio, five are buyouts vehicles to which CalSTRS has committed $532.9 million, while four are venture funds that secured a total of $75.5 million in commitments. The pension committed another $84.5 million to co-investments in clean technology.

“The majority of the pre-2008 commitments went to venture capital funds, which in general have performed below expectations across all sectors,” CalSTRS staff wrote in a November report. “Unlike most other sectors, which have recovered since the recession, the cleantech sector continues to be lackluster.”

The outlook is slightly more optimistic for cleantech buyouts, though the returns still lagged.

“CalSTRS is and will remain an investor in this sector, but with a greater focus on energy efficiency and infrastructure than on clean technology ventures,” said Chief Investment Officer Christopher Ailman in an email.

LPs take a risk when they invest for reasons other than return, sources told Buyouts. This includes prioritizing social or environmental outcomes. It can be tough to find the right balance between helping bolster a social good and reaping strong returns.

“Solar, wind — pretty much everything but hydro — is not competitive without subsidies or mandates,” said Jay Yoder, partner and head of real assets for Altius Associates, an advisory firm and separate accounts manager. “So what you’re really investing in is government policy, not an asset.”

Even so, CalSTRS considers investment in solutions or mitigants to global warming and other environmental concerns a priority. Ailman took a seat on a United Nations board to oversee responsible investment in 2014. Over the last decade, the UN pushed institutional investors to consider environmental, social and governance (ESG) factors in their investment processes, and CalSTRS was one of many limited partners to incorporate those concepts.

CalSTRS went a step further than most, however. In 2007, the pension set up the Green Initiative Task Force to address global environmental issues, backing its effort with significant investments in environmentally friendly assets. In 2014, the pension set aside up to $3.7 billion for investments in clean energy and technology across all asset classes.

“The challenges of the clean technology sector in the first chapter were really brought about by a wide number of things, but really it was the big asteroid that came to earth called the ‘global investor crisis,’” said Tom Soto, a managing director at global asset manager TCW and clean energy investment expert.

Weak returns from pre-crisis clean energy portfolios aren’t unique to CalSTRS. A California Public Employees’ Retirement System portfolio managed by Capital Dynamics also performed poorly, netting negative 9.7 percent as of March 31, according to the pension’s website. Cambridge Associates’ global clean technology benchmark, which includes investments in renewable power and energy, grossed an internal rate of return of just 5.1 percent as of March 31.

There are bright spots. Investments in renewable power developments cracked double-digits at 10.1 percent, according to Cambridge. Notably, the lone performer in CalSTRS’ portfolio is Riverstone/Carlyle Renewable Energy II, a joint venture between Carlyle Group and Riverstone Holdings. That $3.4 billion fund generated a 6.39 percent IRR as of March 31.

Furthermore, while the first wave of investment in clean energy and technology underperformed, demand for more investment may shift as markets direct more resources toward addressing environmental concerns, Soto said.

The transition to environmentally friendly technologies does not necessarily come at the cost of the economy. To that point, California’s carbon dioxide emissions fell by more than 11 percent between 2007 and 2013, according to the U.S. Energy Information Administration. During that same period, the state’s real gross domestic product grew by 7.3 percent.

As governments grow friendlier to the idea of clean energy, and as more industries adopt clean technology solutions, new investments stand a chance to outperform.

LPs “certainly believe in the long-term that [early funds’ losses] will be made up with funds II, III, IV, V, VI and beyond,” Soto said. “They see what’s going to happen seven or eight years from now, and they want to make sure that they’re there before the hockey puck arrives.”

CALSTRS’ cleantech portfolio
Fund Year Commitment ($mln) Type Investment comments IRR as of March 31, 2015
Riverstone/Carlyle Renewable & Alternate Energy Fund II 2008 $300.00 Buyout Focus on worldwide buyout and growth capital control investments involving renewable and alternative energy companies. 6.39
VantagePoint Cleantech Partners 2006 $15.20 VC New practice group for CalSTRS longtime venture capital partner; headquartered in San Bruno -1.94
USRG Power & Biofuels Fund II 2007 $60.00 Buyout Focus on small renewable power and biofuels projects in North America; headquartered in Santa Monica, CA and White Plains, NY -2.91
Hg Renewable Power Fund 2006 $60.80 Buyout Specialty investment for London-based buyout firm. Finances renewable energy projects, primarily wind assets in Europe. -3.35
Craton Equity Investors II 2012 $15.30 VC Los Angeles-based firm specializing in clean technology growth companies. -12.39
Craton Equity Investors I 2006 $30.00 VC Los Angeles-based firm specializing in clean technology growth companies. -18.63
Carlyle-Riverstone Renewable Energy Infrastructure Fund 2006 $50.00 Buyout Specialty product for mainline energy investment firm. Finances renewable energy projects globally but primarily in the U.S. -32.88
Hg Renewable Power Fund II 2010 $62.10 Buyout Specialty product for London-based buyout firm. Finances renewable energy projects, primarily wind assets in Europe. -33.6
NGEN Enable Technologies Fund II 2005 $15.00 VC Materials sciences focus; headquartered in Santa Barbara. -49.75
Co-Investments N/A $84.50 Co-investments Portfolio of four co-investments includes small-scale alternative energy financing, landfill gas, waste-to-energy company, and solar thermal business N/A
Source: CalSTRS