Earlier this year, I opined that CalPERS’s tough stance on fees would limit its selection of quality GPs.
The theory goes like this: The best GPs in the business don’t need to concede on terms and conditions; they can dictate terms. Lesser GPs need to offer a buffet of sweeteners to persuade LPs to come to the table.
It’s not even my theory, really. It’s something I’ve heard repeatedly from folks in the market, both on the GP and LP side.
Turns out CalPERS’s PE consultant is seeing this dynamic around the pension system’s massive consolidation of its private equity portfolio to 30 core managers. Reporter Sam Sutton wrote recently on the issue.
“Overall, we note a trend of fewer proposals and fewer commitments in recent years, which seems unexpected given the strong fundraising environment. We have not researched the reasons for this decline,” says a report from consultant Meketa Investment Group.
CalPERS is aware of its weakened position in the PE market. “A number of successful GPs have told us that we’ve become too unpredictable to do business with,” CalPERS Investment Director John Cole said in a July presentation. GPs are also cutting back the amounts they’re willing to allocate to CalPERS within their funds, he said.
This situation stems from the pension system’s admirable efforts to push back on fees and other terms and conditions. For several years, CalPERS has led the way in being tough on GPs. But the unexpected consequence of that stance is a loss of status in the PE market. CalPERS, once considered the most important LP in the market, is now almost an afterthought for some GPs, including some of the highest-profile shops.
The way I hear it from sources is that no one wants to deal with CalPERS, either on the front end while negotiating terms on new funds, or through the life of the fund with what they say are the pension’s rigorous reporting requirements.
A couple years ago CalPERS also came out hard against at least one fund-restructuring process involving First Reserve. LPs approved the restructuring despite CalPERS’s concerns, but the pension’s ex-PE chief, Real Desrochers, helped perusade LPs to not sell their interests in a First Reserve fund because the price was too low.
A letter Desrochers sent to other LPs managed to make its way into my hands, and then out into the public realm (which it should, given that CalPERS is a public institution).
It’s this type of tenacity that in my opinion is admirable, but also detrimental to the system’s ability to attract the best and brightest GPs.
CalPERS is now considering the future of its private equity program, including turning the reins over to BlackRock to run the show. It might not be a bad idea considering how far the system has fallen in the eyes of many GPs.