Trying to counter claims aired at a recent state Senate hearing, Joe Dear, chief investment officer of the California Public Employees’ Retirement System, wrote a letter to the hearing chairman saying he was “troubled by testimony that questioned our commitment and intentions” with regard to emerging managers – investment firms that are often managed by women and minorities.
Those testifying at the hearing not only accused the $244 billion pension fund of backing off its commitment to emerging managers but also claimed that CalPERS was steering too much money to established firms, including managers of “mega-buyout” funds, an accusation that Dear disputed.
Dear walked a delicate line in his letter to Sen. Curren Price Jr. Even as he emphasized that CalPERS retained an “unwavering continued commitment to emerging and diverse investment manager strategies,” he bemoaned the performance of CalPERS’s emerging managers generally.
“CalPERS’s emerging managers have underperformed their respective asset classes in almost all circumstances,” Dear wrote.
In data that accompanied the letter, the underperformance of CalPERS’s emerging managers was striking. In private equity, for example, returns of emerging managers fell well below the returns for the asset class as a whole. For the last three years, emerging manager returns in private equity were 12.3 percent, compared with 20.0 percent for private equity overall. For the last five years, emerging manager returns were 3.9 percent, compared with 7.2 percent for the private equity program overall. And since inception, private equity emerging managers returned an average of 7.0 percent, compared with 11.0 percent overall.
“At the end of the day, what matters most is the risk adjusted return,” Dear wrote.
In part, Dear’s letter to Price helped rebut hearing testimony claiming that emerging managers generally over-performed, not underperformed. Price, in an email to Buyouts Magazine, published by Thomson Reuters, wrote that data from the National Association of Investment Companies paints “quite a different picture” than that presented in the testimony and shows that “some of these emerging managers are performing well.” CalPERS’s goal should be “to find and use these firms,” he wrote.
The question of CalPERS’s commitment to emerging managers first arose after some recent high-profile changes to its programs. Earlier this year, Credit Suisse won a bid from CalPERS to manage a $100 million private equity fund of funds called Capital Link Fund III. Because the two predecessor funds had each been a far larger $500 million, some saw evidence that CalPERS’s commitment to emerging managers was wavering.
More fodder for critics came from the phase-out, announced in August, of the $1 billion California Initiative program, a private investment fund earmarked to invest in companies located in the state’s economically disadvantaged areas. According to a CalPERS report, the program, which was launched in 2001, “has not met CalPERS investment return expectations.”
CalPERS has said repeatedly that one of its overarching goals has been to reduce the overall number of investment relationships. At present, it has more than 300 external relationships with emerging managers. Said Brad Pacheco, a CalPERS spokesman: “We’ve had to do some portfolio restructuring, and that has led to the ending of some relationships.”
Despite recent changes to some programs, the system still heralds its $1 billion in commitments to emerging market managers (almost all within its private equity portfolio) since 2009. That amounts to 18 percent of the system’s $5.2 billion in private equity commitments since 2009, which is identical to the 18 percent share of emerging manager commitments that CalPERS made before the financial crisis. For all asset classes, CalPERS has invested $9.7 billion with emerging managers, about 11 percent of its externally managed capital, according to the pension fund.
In related news, CalPERS recently announced a series of workshops for prospective emerging market managers aimed at explaining how the system evaluated such managers and their investment pitches. “We have heard loud and clear from the emerging manager community that we can do a better job with our external outreach,” Dear said in a press release.