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Pension Funds

CalPERS eyes creating corporate structure for direct private equity investing

CalPERS is exploring a new program to invest directly in private equity and late-stage venture capital through a corporate structure in partnership with an investment management team, said Theodore "Ted" Eliopoulos, chief investment officer, in an interview on Thursday.

Plans call for the program — named CalPERS Direct — to launch in the first half of 2019, following final review and approval by the board. The program is being sorted out in closed session and board members say that they have yet to vote on the program.

The board has not yet voted on the private equity direct investment model, said Taryn Kinney, press secretary for California Controller Betty T. Yee, a CalPERS board member, in an email.

The corporation would make direct investments in companies on CalPERS' behalf, much like a separate account in real estate but the corporation would be outside of CalPERS with its own board and management team, Mr. Eliopoulos explained. CalPERS currently has a 8%-to-10% target range for private equity. CalPERS is not releasing the allocation to direct private equity investments or the potential size of the portfolio.

At least one board member says staff should do more research to make sure the program would offer better returns and ensure that setting up an outside corporation is legal.

The direct investment program would be one of the four strategies or "pillars" CalPERS would have at its disposal to invest in private equity, Mr. Eliopoulos said. The first is CalPERS' emerging manager fund-of-funds program. The second pillar is the current investment portfolio with traditional private equity managers. CalPERS officials are looking for strategic partnerships to augment "our own very experienced staff's capabilities to invest in private equity … to include things like co-investments and co-sponsorships as well as secondary investments in separate account," he said.

The third and fourth pillars would be the two direct investment programs. One direct program would make late-stage venture capital and growth equity investments in companies in technology, life sciences and health care. The second would make long-term investments in established private companies.

The $355.9 billion California Public Employees' Retirement System, Sacramento, has not had an executive heading up its private equity team since Real Desrochers, former managing investment director of the private equity program, left last year. Mr. Eliopoulos said that he is heading up the search for a replacement and he hopes to have a replacement named as early as June.

Mr. Eliopoulos said the board in closed session at its most recent meetings Monday through Wednesday​ approved moving forward with talking with industry professionals about the makeup of both the independent advisory boards and finding management teams for the direct investment programs. Staff will return to the board throughout the process that is expected to take about a year, including a "final definitive action," he said.

CalPERS' investment office will now begin talking with industry professionals about the makeup of both the independent advisory boards and the management teams.

Ms. Yee noted in a statement that CalPERS began reviewing private equity models over 18 months ago to help achieve the fund's investment return goals.

"Historically, private equity has generated the highest returns of all the investments the fund makes," Ms Yee wrote. "I believe the CalPERS Direct model is an innovative new approach, but one that must be carefully structured and vetted — including the governance and fee structure — before a decision on final implementation is made."

Margaret Brown, a new board member who started in January, said that staff is moving forward without full board approval.

She said that staff is moving forward without providing the board with written details including budgets, business plans or a thorough analysis of risks and projected returns.

"I don't even know what the staff is proposing is legal. Fiduciary counsel just joined the conversation on Monday at my request," Ms. Brown said in an interview. "I am worried we are setting up a private entity that would be making investment decisions and with no accountability and transparency rules ... I think it is problematic ... not to mention there is no data and no research to suggest the investment strategies would give better returns on our investments."

CalPERS declined to comment on Ms. Brown's assertions, said spokeswoman Megan White in an email.