CalPERS goes big on medium

  • Plans to allocate $2 bln to mid-sized firms over five years
  • Some GPs outgrow emerging manager program
  • $301.6 bln pension winding down relationships with certain GPs

The program, dubbed the “Emerging Manager Transition Plan,” will invest in GPs that outgrow the $301.6 billion retirement system’s emerging manager platform, which is largely managed by Grosvenor Capital Management . CalPERS formed similar transition plans for emerging real estate and global equity managers.

“The goal is to establish a pipeline of external manager talent,” said Senior Portfolio Manager Laurie Weir during CalPERS’ June 15 meeting. “While each asset class is different, in each case the manager transition program will provide the opportunity to invest in follow-on funds [for] incrementally larger commitment amounts.”

Within private equity, the transition plan will target GPs raising their third through sixth institutional funds, with typical commitments ranging between $50 million and $300 million in size, according to pension documents. The transition plan could include up to 15 direct relationships with GPs overseen by CalPERS staff.

Commitments may include re-ups with firms whose first or second institutional funds were backed by the Grosvenor account, according to retirement system documents.

The formation of the transition programs comes in the wake of CalPERS’ plan to downsize its number of relationships with external managers over the next five years. The downsizing would cut roughly 70 relationships from the retirement system’s 100-strong roster of private equity GPs in an effort to reduce fees and improve performance.

“Larger capital commitments [to proven managers] ensures more competition for our capital, better performance – we believe – and more favorable fee structures,” said CIO Ted Eliopolous during the June meeting.

In the run-up to the downsizing announcement, staff realized the cutbacks would eliminate exposure to mid-sized firms that are too large to qualify for emerging manager programs, but too small to compete with established firms for direct investment mandates, according to retirement system documents. CalPERS’ commitments to established private equity managers typically exceed $350 million, roughly 18 times the size of the $20 million maximum commitment to funds sourced through the emerging manager program.

“The establishment of this manager transition program is particularly timely in light of the portfolio restructuring,” Weir said. “The new manager transition program will help fill the gap between emerging managers and large established managers.”

The transition plan will also make an effort to target funds raised by women or minority-owned fund managers, a point that was applauded by CalPERS’ investment committee during the retirement system’s June 15 meeting.

“I think this is a real step up in our emerging manager program,” said CalPERS board member Priya Mathur during the meeting. “It also demonstrates a meaningful commitment to the managers [in the emerging manager] space, particularly at a time when we are reducing the number of managers across our entire portfolio.

Sidebar: CalPERS’ PE Emerging Manager Program

Even as CalPERS moves forward with plans to wind down roughly two-thirds of its relationships with private equity general partners, the retirement system will continue to commit to first- or second-time fund managers through its emerging manager program.

CalPERS expects to commit up to $500 million to emerging managers between 2015 and 2020, according to retirement system documents.

The private equity emerging manager program was valued at $6.8 billion as of June 30, 2014, according to pension documents. The program includes commitments to 267 active managers, most of which were made through separate accounts or funds-of-funds.

CalPERS has committed to five funds through Grosvenor’s emerging manager program since March, according to pension documents. Commitment sizes could not be found at press time.

General PartnerFundStrategy
Avante Mezzanine PartnersAvante Mezzanine Partners SBIC II, LPMezzanine finance for PE-backed buyouts and transactions
NovaQuest Capital ManagementNovaQuest Pharma Opportunities Fund, LPExpansion/late-stage investments in clinical assets, commercial biopharmaceutical products
Stellex Capital ManagementStellex Capital PartnersDistressed and special situations investment in mid-market companies
Revelstoke Capital PartnersRevelstoke Capital Partners FundControl investments in healthcare, business services companies
EIV CapitalEIV Capital Fund IIGrowth capital for energy sector companies
Source: CalPERS