It has been a trend fueled by investors frustrated with lack of access to invitation-only firms and convinced that they or their advisers can pick tomorrow’s big winners while still hatchlings. So how have these programs performed?
Not a lot of data is available publicly to address the question. The few pensions funds that both sustain emerging manager programs and disclose returns don’t typically break out their results.
Fortunately, the California Public Employees’ Retirement System, which launched one of the largest such programs in 1998 with a $350 million commitment to Grove Street Advisors LLC, of Wellesley, Massachusetts, discloses detailed returns every quarter for its California Emerging Ventures portfolio.
It is one of the largest programs of its kind, having since grown to nearly $2.6 billion in invested capital in pre-2009-vintage funds, including $1.2 billion in funds Buyouts has identified as tagged for either buyouts or growth equity. (While originally focused on venture capital, the program later expanded to include other forms of private equity.)
True, it is a not a perfect example of an emerging managers portfolio. From the start Grove Street Advisors had a mandate not just to unearth the “blue-chip funds” of tomorrow, in the words at the time of Barry J. Gonder, then senior investment officer at CalPERS and now a managing partner at Grove Street Advisors, according to an article I wrote in the November 1998 edition of newsletter Private Equity Analyst, published by Dow Jones. It was also to invest with “the top-performing existing firms.”
Still, a rundown of the 168 pre-2009 vintage funds backed through the program finds a significant number of low single-digit Roman Numerals or none at all (see attached table). Buyout and growth equity funds in this category include the 2008-vintage Huntsman Gay Capital Partners LP, the 2000-vintage Quadrangle Capital Partners LP, and the 2000-vintage Solera Partners LP.
A spokesperson for CalPERS referred me to Grove Street Advisors for information on the program, including its future (the portfolio stops abruptly in 2009, with just two commitments to vintage-2009 funds). A spokesman for Grove Street Advisors said his firm was bound by confidentiality agreements with its client not to talk to me about California Emerging Ventures. So, a dead end. But at least I could generate some basis statistics to illustrate how the portfolio has performed; to perform the calculations, Buyouts first categorized the funds by investment strategy, identifying some 58 buyout and growth equity funds and 103 venture capital funds.
Overall the results look solid, taken in context. The results of the buyout and growth equity portfolio look roughly in line, if not a little better, than historic returns for such funds dating back to the early 1980s, based on the Buyouts annual returns database last profiled in the Aug. 13, 2012, edition, with most returns updated through year-end 2011. For example, bottom-quartile, median and top-quartile IRRs for the buyouts/growth equity pool in California Emerging Ventures, including international funds, are estimated at 2.4 percent, 10.6 percent and 17.2 percent; for our entire returns database, with comparable funds dating back to the early 1980s, they are 2.4 percent, 9.3 percent and 17.1 percent.
On the venture side, it is important to take into account timing, since Grove Street Advisors began investing in the asset class not long before the tech bubble burst in the early 2000s. Its bottom-quartile, median and top-quartile IRRs for its domestic and international venture capital pool are estimated at -4.6 percent, 1.2 percent and 7.7 percent; that’s fairly consistent with our entire returns database of domestic and international venture capital funds, dating to the early 1980s, where the comparable figures are -5.1 percent, 2.3 percent and 10.5 percent.
Of course, the full value of an emerging markets program is impossible to measure. A big part of it lies in the gratefulness of general partners who never forget their early financial supporters.
Those GPs that go on to consistent top-quartile performance can reward those early backers with unfettered access to their funds. They can also offer sweeter terms than those negotiated by investors late to the party.