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ALTERNATIVES

CIO Eliopoulos sees direct investment in CalPERS’ future

Theodore Eliopoulos
CalPERS CIO Theodore Eliopoulos

Theodore Eliopoulos, chief investment officer of the California Public Employees' Retirement System, wants the $323.6 billion retirement system to begin a direct investment program within the next several years that would allow CalPERS to buy companies directly without private equity partners.

The direct investment program might be the first step in CalPERS running its own private equity program, but that could take as long as 20 years, Mr. Eliopoulos said at a CalPERS board retreat meeting in Monterey, Calif.

At a news conference Monday, Mr. Eliopoulos said he sees companies in the life-sciences area as potential acquisition targets for Sacramento-based CalPERS. He expects to issue a more detailed report about the direct investment program to the CalPERS board in six months.

Unlike the traditional private equity buyout model, in which general partners buy portfolio companies with the aim of selling them for a profit after a multiyear holding period, Mr. Eliopoulos sees CalPERS taking a buy-and-hold approach, buying companies for the long term that can produce a steady of profits, helping the pension plan's investment returns.

Mr. Eliopoulos made his comments at the end of a daylong meeting, most of it dealing with CalPERS' $26.4 billion private equity program, its best-performing long-term asset class. For the fiscal year ended June 30, private equity returned 13.9%; public equities produced a return of 19.7%.

The discussion comes as critics have said CalPERS pays too much to private equity general partners. The system paid more than $800 million in fees to its private equity general partners in the fiscal year ended June 30, 2016, the most recent data available.

CalPERS also faces increasing competition from other institutional investors that also want to invest in oversubscribed funds from top-performing managers.

John Cole, a CalPERS senior investment officer, said at the meeting that the pension fund finds it difficult to pay enough to retain private equity staff because of the state salary structure, making the case for running a direct investment program through a separate private equity corporation, whose staff could be paid salaries competitive with the private sector.

Real Desrochers, managing investment director of the CalPERS private equity program, resigned in April to work for an overseas bank.

CalPERS also assembled a panel of experts to discuss options for the private equity program including Mark D. Wiseman, former president and CEO of the Canadian Pension Plan Investment Board; Mario Giannini, CEO of alternative investment firm Hamilton Lane; and Sandra Hornbach, managing director and co-head of U.S. buyout for the Carlyle Group.

Mr. Wiseman, who is now global head of active equities at BlackRock (BLK) and chairman of BlackRock Alternative Investors, said he believes CalPERS could successfully create a private equity corporation, which would have its own independent board of directors.

Canadian pension plans, including the Canadian Pension Plan Investment Board, are known for their direct investment programs.

CalPERS board member J.J. Jelincic questioned why CalPERS couldn't just make direct investments by adding staff to its existing private equity program instead of creating a separate corporation. Mr. Wiseman said that would create a “we-they environment,” if the private equity staff was paid more than the rest of the investment staff. Mr. Wiseman also expressed doubt that an internal CalPERS private equity program could compete with managers like KKR and Carlyle.

State Controller Betty Yee, a board member, questioned why CalPERS was considering “leapfrogging” to a direct investment private equity corporation, when it wasn't addressing other more immediate concerns, such as building its private equity co-investment program.

CalPERS has only $1.8 billion in co-investments, investment vehicles that invest along side of private equity funds. The investment vehicles usually carry no management fees and often no carry fees.

Mr. Eliopoulos agreed the pension system needs to build a stronger co-investment capability and said that would be one of his priorities as to changes that could be made to the private equity program in the next few years.