Pension: California Public Employees’ Retirement System
Assets Managed: $243 Billion (Oct. 1, 2012)
PE Assets: $34 Billion (June 30, 2012)
PE Allocation (Target): 14% (14%)
Chief Investment Officer: Joe Dear
Testimony at the hearing not only accused CalPERS of reducing its commitment to emerging managers but also said CalPERS was steering the money to “mega-buyout” firms, a charge that Dear denied.
Nevertheless, Dear was walking a delicate line with emerging managers, a group that includes not only less-experienced managers, but also managers from underrepresented groups like women and minorities. Even while emphasizing that CalPERS retained an “unwavering continued commitment to emerging and diverse investment manager strategies,” Dear bemoaned the performance of CalPERS’s emerging managers generally, saying that “CalPERS’s emerging managers have underperformed their respective asset classes in almost all circumstances.”
In a chart that accompanied the letter, which was obtained by Buyouts, the underperformance of CalPERS’s emerging managers was striking. Returns among private equity emerging managers were well below returns for the asset class as a whole. For the last three years, emerging manager returns were 12.3 percent compared to 20.0 percent for private equity overall, an underperformance of some 39 percent. For the last five years, emerging manager returns were 3.9 percent compared to 7.2 percent for the private equity program overall, a 46 percent underperformance. And since inception, private equity emerging managers returned an average of 7.0 percent compared to 11.0 percent overall, a 36 percent underperformance.
Dear’s focus on the underperformance of CalPERS’s emerging manager programs sent a message that a firm’s status as an emerging manager was no excuse for poor performance. “At the end of the day, what matters most is the risk adjusted return,” Dear said.
In part, Dear’s letter to Price was intended to rebut testimony claiming that emerging managers generally over-performed, not underperformed. Price wrote to Buyouts, saying “the National Association of Investment Companies paint [sic] quite a different picture and show that some of these emerging managers are performing well.” That some managers perform well was never in dispute, and in his statement, Price backtracked from his testimony by saying many of these emerging firms “are over-performing and the goal is to find and use these firms.”
But Dear nevertheless sought to allay the criticism and improve increasingly tense relationships in the emerging manager community. As part of that effort, CalPERS announced a series of workshops for prospective emerging market managers aimed at explaining how the system evaluates 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.
The question of CalPERS’s commitment to emerging mangers arose after some recent high-profile changes to its programs. Earlier this year, Credit Suisse won a bid to manage a $100 million captive fund of funds called Capital Link Fund III. Some saw the new fund’s size—$100 million—and compared it to its predecessors, Capital Link Funds I and II, each of which secured $500 million, and saw evidence that CalPERS’s commitment to emerging managers was wavering.
Another morsel for critics was the phase-out, announced in August, of the $1 billion California Initiative program, which aimed to invest in companies that were based in the state’s economically disadvantaged areas. According to a CalPERS report, the program, launched in 2001, “has not met CalPERS investment return expectations.”
Brad Pacheco, a CalPERS spokesman, acknowledged the changes, saying, “We’ve had to do some portfolio restructuring, and that has led to the ending of some relationships.” Dear has said repeatedly that one of CalPERS’s overarching goals was to reduce the overall number of the pension’s relationships, although he did not mention emerging managers specifically. CalPERS maintains more than 300 external relationships with emerging managers overall.
Despite recent changes to some programs, the system still heralds its $1 billion in commitments to emerging market managers (almost all within the private equity portfolio) since 2009. That amounted to 18 percent of the system’s $5.2 billion in overall private equity commitments since 2009, which is identical to the 18 percent share of emerging manager commitments—or $7 billion out the $36.7 billion—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.
Still, the criticism has left an impact on a pension system that was among the first to invest in such managers in a big way. Said Pacheco, the spokesman: “CalPERS has been—and continues to be—a leader in developing emerging manager programs,” adding that its “past and future commitment to emerging mangers is clear and unequivocal.”