LP briefs, week of March 24, 2008

CalPERS commits to new managers

The California Public Employees’ Retirement System continues to look for fresh talent.

The $240 billion state pension fund recently committed $150 million to Leading Edge Investment Advisors, a 3-year-old San Francisco-based fund of funds that specializes in backing emerging managers, and $150 million to Quotient Investors in New York, a months-old quantitative equity management firm.

Both general partnerships tilt their strategies toward public equities—Leading Edge through new funds, and Quotient Investors through its own new vehicles, one of which is a large-cap fund, and a second fund that focuses on small-cap stocks.

Leading Edge was founded in July 2005 by Clayton Jue, who previously oversaw the emerging managers program at the multi-bank holding company Northern Trust Global Advisors, where he first became acquainted with CalPERS.

Jue says that while Leading Edge “doesn’t fall into the category of private equity” right now, it is putting together a similar program on behalf of CalPERS that will fund emerging private equity vehicles.

Last month, the state pension fund awarded $350 million to other emerging managers. It committed $150 million to Philadelphia-based FIS Group, a 12-year-old funds of funds manager that backs emerging managers. FIS Group has nine funds in its current lineup, including three African-American owned firms and two owned by women. CalPERS invested another $200 million in 10-year-old money management firm Redwood Investment Management of Stamford, Conn. —Constance Loizos

Shine is off mega-firms

Mega-firms have officially lost their luster.

Limited partners in North America and Europe predict that 2008-vintage funds larger than $5 billion will generate distinctly un-mega returns, according to the annual investor survey conducted by Probitas Partners, a San Francisco-based placement agent.

In 2008, mid-market funds are shaping up to be the belles of the ball, with LPs reporting that they plan to spend most of their time looking at mid-market vehicles and that they expect the best returns from those funds. The survey reported that distressed-debt funds, aimed at taking control stakes in companies, also proved popular among investors.

Among North American investors, 57% of respondents said that they expect the best returns from 2008 vintage funds would come from U.S. middle-market vehicles. European middle-market funds came in second, with 41.7 percent. In third, with 31.8% of the vote, was U.S. venture capital vehicles.

Respondents were allowed to pick two categories from a group of six, so the percentages add up to greater than 100.

When the same question was put to European investors, they favored the home team. Nearly three out of four European LPs predicted that European middle-market funds will provide the best returns this year. In second place were U.S. mid-market funds, with 36 percent.

“Across the board, there’s not much interest in mega-buyout funds,” says Kelly DePonte, a partner with Probitas Partners, who adds that the survey comes at a time when there’s almost no financing available for mega-deals, while middle-market deals can still get done.

He adds that some LPs cited a drop in projected mega-fund returns as a reason their interest in those pools has waned. —Joshua Payne

CalPERS defers fight on fund restrictions

The California Public Employees’ Retirement System last week deferred its debate on whether to fight back against a state legislative proposal that would preclude them from investing in private equity funds whose management companies are partially owned by certain sovereign wealth funds.

As PE Week previously reported, CalPERS was scheduled to vote last week on a staff recommendation that it oppose the bill. California State Teachers’ Retirement System has already come out in formal opposition to the bill.

Last week, the CalPERS board deferred a decision until its April meeting.

CalSTRS estimates that the bill’s passage could cost it between $1.5 billion and $5.3 billion in lost investment revenue over five years. CalPERS’ staff was still preparing an analysis of lost opportunity.