CalSTRS To Study Infrastructure In 2007

The California State Teachers’ Retirement System plans to commit about $6 billion to some 15 funds this year and, while re-ups may be the order of the day, the pension fund also has an interest in infrastructure funds, emerging managers, Asian funds and clean energy funds. The pension fund may also look into the possibility of stepping up its co-investment program.

Through its alternative investment program, which debuted in 1988, CalSTRS has built an $12.3 billion portfolio of alternative investments, and about two thirds of that value is for LBO funds. Venture capital, expansion capital, distressed debt and mezzanine debt funds make up the balance. It has another $13.3 billion in unfunded commitments.

Like other West Coast pension funds, CalSTRS has a well-deserved reputation for writing big checks to long-established firms. The pension fund, for instance, recently committed $800 million to First Reserve Partners XI, a $7.8 billion energy-focused fund, and $1.09 billion to the $15.6 billion Blackstone Capital Partners V LP, a generalist fund.

Real Desrochers, head of the 14-person alternative investment program staff, wrote in a business plan approved by the investment committee last fall that his goal was to continue “the successful strategy of investing in a diversified portfolio of a relatively concentrated number of premier managers with proven talent and a good alignment of interests.” Indeed, the CalSTRS alternative investment program has posted a net IRR of 18.9% since its inception in 1988.

That said, CalSTRS also planned to study the possibility of launching several new initiatives, according to the business plan. Among these:

• investing in other assets classes, such as infrastructure finance and hedge funds;

• seeding new firms to invest in specific markets;

• expanding the size and scope of the co-investment program, including alongside general partners outside the CalSTRS portfolio; and

• direct investing in public or private investment vehicles to minimize fees and carried interest.

In a December interview with Buyouts, Desrochers provided a few additional details, saying that the pension fund does plan to conduct a study of infrastructure opportunities to be released this June or July. Among other things, the study will look at how deep the pool is for investment talent in the market.

However, Desrochers said he’s already convinced there’s “good money to be made” financing such projects as the building and maintenance of airports, roads and power plants. In Europe in particular, Desrochers said, infrastructure plays offer huge opportunities.

CalSTRS also continues to have a measurable appetite for backing emerging managers this year. “You don’t want to stay with the well-established firms all the time,” said Desrochers. “You might miss an opportunity.” CALSTRS defines private equity emerging managers as those with $600 million or less in assets under management. Also, the current funds of these managers can’t carry a Roman numeral higher than III.

The pension fund doesn’t invest with these managers directly, but rather backs them through funds of funds. “It takes a very special set of skills” to work with new managers, said Desrochers. “It is more labor-intensive, more difficult, much more time-consuming.”

In May, CalSTRS hired Altura Capital of New York to compile a database comprised entirely of emerging managers in order to identify new private equity funds, private equity funds of funds, and other investment managers.

The pension fund calls its investments in emerging managers its “Proactive Portfolio.” Recent funds to get commitments from the Proactive Portfolio include Nogales Investors Fund I ($25 million), Yucaipa Corporate Initiatives Fund I ($150 million) and Palladium Equity Partners III ($40 million). For the year leading up to last march, CalSTRS made $403.1 million in commitments through the program.

Clean Energy, Asia

Outside of the big re-ups and emerging managers, CalSTRS also maintains an interest in clean energy and Asian funds.

CalSTRS committed some $187 million to the clean energy and technology sector in the year leading up to last March. Select commitments include $58 million to a European wind farm energy infrastructure fund called Hg Renewable Power Fund, and a $50 million commitment to a North American renewable energy infrastructure/buyout fund, the Carlyle/Riverstone Energy Infrastructure Fund I.

When asked what he planned to invest in for 2007, Desrochers said CalSTRS would invest “a bit more in Asia”–CalSTRS’s current investments are primarily in the U.S., followed by Europe. So far, the pension fund is preparing to close on two large commitments in Asia, one for $150 million, he said, while the other is for slightly less.

CalSTRS At A Glance

Total Assets Under Management: $156.1b (as of 11/30/06)

Target Allocation to Alternative Investments: 9%

Commitments to Alternatives: $13.3 billion (as of Sept. 30)

Investments in Alternatives: $12.3 billion (as of Sept. 30)

Performance: Net IRR as of 1Q06: 18.92% (since inception in 1988); 29.02% (1 yr); 27.97% (3 yr); 13.40% (5 yr); 19.23% (10 yr.)

Recent Buyout Fund Commitments:

EnCap Energy Capital Fund VI LP (up to $150m)

Blackstone Capital Partners V LP ($1B)

Bain Capital Fund IX LP ($100m)

First Reserve XI ($800m)

Consultant: Cambridge Associates