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Editor’s Letter: The weird, wild world of CalPERS private equity

California Public Employees’ Retirement System is in talks under which BlackRock would take over its $26 billion private equity portfolio, according to Bloomberg.

This is some weird, wild stuff.

CalPERS, if you haven’t noticed, has been heavily scrutinized around PE, mostly because of its past inability to fully track the costs of the program. Like many public systems, for example, CalPERS never tracked the total amount of carried interest it paid to its private equity managers until 2015. It discovered that since inception it had paid its PE managers $3.4 billion in carry on profits of $24.2 billion. (Actually, that’s a pretty good overall carry rate.)

“We have been rewarded for the risk we took in the [private equity] program, and the costs we incurred,” Ted Eliopoulos, CalPERS’s investment chief, said in a conference call at the time, according to the Wall Street Journal.

But Eliopoulos has not been happy with private equity, in part because of the public criticism the system has faced over the program. He told the board in June the negative public scrutiny of the asset class had made “it increasingly difficult for CalPERS to compete successfully in the private equity marketplace.” ‘

The “fish bowl of CalPERS may have reached a tipping point for us in private equity,” said Eliopoulos, according to Reuters. “Over the course of the past two years and frequently in these monthly investment committee meetings, CalPERS staff is attacked and denigrated for our decision to invest in these funds.”

It’s not clear to me why public criticism should matter in the larger scheme of the investment team’s mission of generating great returns to meet its obligations to retirees. But there it is. Apparently hurt feelings are a legitimate reason to change investment focus.

CalPERS has had ideas about private equity. Eliopoulos mentioned potentially bringing more functionality in-house that would allow the system to invest directly into businesses, like the Canadian pensions. But that would require building an investment team and paying them something commensurate to the private sector. And that is a tough sell for public systems in America where unions rail against anyone making too much money. The WSJ reported earlier this year CalPERS was considering actually buying a private equity firm.

“I’m excited about our initiative to look at alternative ways to invest in private equity. It’s very embryonic. It’s very early days, but I think long term that’s something CalPERS could be a leader in,” Chief Operating Investment Officer Wylie Tollette told Buyouts in a prior interview.

So apparently, if the reporting is to be believed, another plan would be to outsource the whole thing to a giant asset manager. It’s unclear how that saves on fees, as CalPERS would still be on the hook to pay fees and carry to managers in its portfolio, along with, I assume, paying some sort of fee to BlackRock for managing the portfolio.

I’m concerned, too, that this move could make PE less transparent, as the entire portfolio would fall under the auspices of a public corporation.

This is all very early, preliminary stuff, as the Bloomberg article makes clear. So it’s possible nothing at all will happen and this will serve simply as an opportunity for me to opine.

What is clear is that CalPERS is serious about significantly restructuring its private equity program in one of two very different directions – giving itself much more control over the program, or washing its hands of the program and letting someone else deal with it.

Private Equity Editor Chris Witkowsky reflects at home. Photo by Wendy Witkowsky