As it explores options, CalPERS considers outsourcing PE to BlackRock

  • CalPERS reportedly in talks with BlackRock to manage $26.2 bln portfolio
  • Could require months-long process, given requirement for public entities
  • Board member: we weren’t informed, learned about it from news reports

Could the world’s biggest asset manager be the solution to the private equity difficulties of the nation’s largest pension fund?

California Public Employees Retirement System is at least entertaining that possibility: CalPERS is in talks with BlackRock over a potential outsourcing of its private equity operations, according to Bloomberg.

“No decisions have been made and we are still looking at models to bring back to the board,” CalPERS spokesperson John Osborn wrote in an email. BlackRock’s Brian Beades said the firm wouldn’t “comment on rumor or speculation.”

CalPERS’s private equity program has been dogged by questions about fees and transparency. In April, Réal Desrochers stepped down as head of the PE program, and in July the board discussed starting to invest directly in private companies to cut down on costs and increase returns.

Bloomberg noted that BlackRock’s Mark Wiseman was among the executives consulted during that board meeting. The retirement system’s $26.2 billion private equity portfolio would be a major prize for BlackRock, which manages $128 billion of alternatives, an amount dwarfed by its public-market assets.

Even if talks are taking place, any deal along these lines “would probably require a request-for-proposal process, given the procurement requirements of public entities,” said David Fann, CEO of TorreyCove Capital Partners. “Large systems usually like to evaluate multiple vendors/proposals and a formal process frequently takes months.”

For limited partners, Fann said “it’s always about control, flexibility, investment performance and costs when evaluating the outsourcing option. For most large systems, control and net-of-fees performance generally favor in-house management.”

That’s certainly the position of CalPERS Board Member J.J. Jelincic, who told Buyouts that he learned of the talks with BlackRock via a Google alert, and knew nothing beyond what’s been in the news. “One other thing I do know is I don’t like being surprised,” Jelincic said.

“What it looks like we’re doing is setting up, or at least considering setting up, a private fund-of-funds, and that doesn’t save fees or get us better performance. On the other hand, if BlackRock says, ‘We will take it over and your all-in cost will be 3 percent’ — including all the management fees, all the incentive fees, the monitoring fees — that’s something I could take a serious look at.”

CalPERS has been paying around 7 percent in total fees on its private equity investments, Jelincic said.

But he remained distinctly skeptical about the value of outsourcing. “I have argued that we need to hire the skillsets, to bring it in-house. … Ted [Eliopoulos, CalPERS CIO] has said we cannot hire the experience that we need to do it ourselves.” Jenlincic rejected that position, pointing out that 1 percent of CalPERS’s PE program, or $260 million, would more than suffice to build up the necessary capacity: “We do not currently have the staff internally to do it, but I think we can go hire it. And it’s not like we’re not paying those costs now; we’re paying them to outside managers.”

Asked what could be motivating the talks with BlackRock, if not concern about fees or performance, Jelincic said, “Our staff has complained about the transparency that the board has been asking for, and this is a way of avoiding that.

“But I think the real answer is to bring it in-house and give us some more control and more transparency, not less transparency.”

In response, CalPERS’s Osborn said, “The board gave clear direction in July to bring back options for PE models in the next six months. That work is underway and we plan to provide updates to the board at our regularly scheduled meetings. Once the options are presented, we look forward to a full discussion on the merits.”

Action Item: Contact CalPERS: