Pension Giant CalPERS Appears Ready To Abandon Most VCs

The nation’s largest public pension fund, CalPERS, appears likely to slash its investments in venture capital in what could be a blow to this still recovering asset class.

Venture capital has wallowed through nearly a decade of difficult returns and sluggish fundraising. The decision by the California Public Employees’ Retirement System to largely abandon new commitments to venture funds will likely prolong the agony.

The California money manager’s new strategy, which it has discussed before, appears tied to flagging returns from its existing investments and concerns that taking a large enough stake in future funds is nearly impossible. CalPERS, with $239 billion in assets, needs to hold significant positions in new securities for them to have an impact on the bottom line.

The pension fund this year has about $2.1 billion in venture capital assets, or 6% of a $34 billion private-equity portfolio that includes buyout, distressed debt and mezzanine funds. The new plan, which will be debated at an investment committee meeting on Aug. 13, would cut that allocation to less than 1%.

If followed through, the plan would make good on signs CalPERS has dropped over the past year that it wants to step away from venture. Whether that means secondary sales is not clear.

The pension fund cites several reasons for the proposed move, “One is that venture has been the most disappointing asset class over the past 10 years as far as returns,” says Joe Dear, CalPERS’s chief investment officer. “Second, it’s very difficult for a large fund like CalPERS to gain access to the best venture partners in the size that makes a difference to our performance.”

The fund’s venture capital portfolio in addition has “little upside remaining,” according to a report to be submitted to the investment board.

Over the past decade, venture capital has been the worst performing asset class in CalPERS’ private equity portfolio. It has delivered a net return of 0.0%, according to June 30, 2012 pension fund data. Part of the poor performance stems from the continuing fallout from the dot-com bust, which saddled many venture funds with negative returns. Performance was hurt again by the recent financial crisis, which had an impact on almost all asset classes.

In the past year or so, venture returns have improved as IPO activity has risen. Still, venture capital has fared poorly relative to other asset classes at CalPERS. Buyout funds, which represent 57% of CalPERS’s private-equity portfolio, have produced average annual returns of 15.4% over the past 10 years, while credit related investments, another big CalPERS investment focus, generated 14.1% annual returns.

Yet venture capital, on CalPERS’ home turf of California, is the stuff of fairytale riches, helping to finance fabled companies such as Apple, Facebook, Google, Twitter and eBay. Most venture-backed firms don’t blossom into multi-billion-dollar goliaths. But they still can produce astronomical returns for investors, and the competition to get in funds managed by Kleiner Perkins Caufield & Byers, Sequoia Capital, and Andreessen Horowitz is fierce.

It is hard to gauge the impact of CalPERS’s plan. Fundraising has been tough in venture with just $11.2 billion raised this year through June. If other large pensions were to follow CalPERS’s lead, it is likely that the pot of money VC funds can access would get smaller.

Reporter Mark Boslet contributed to this story.

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