SACRAMENTO, Calif. - Now that CalPERS has opened its books to reveal all about its private equity portfolio, it turns out the results are in line with the industry - and in many cases better.
The $131 billion California Public Employees' Retirement System's new enhanced website, www.calpers. ca.gov/invest/aim/aim.asp, was unveiled April 30 and for the first time includes a breakdown of the $1.3 billion venture portion of the system's portfolio, with three captive funds of funds managed by Grove Street Advisors LLC, Wellesley, Mass., and a few small buyout funds. The venture capital portfolio, known as the California Emerging Ventures program, posted a total annualized loss of 18% since inception in January 1999. Its late start allowed it to avoid much of the tech bubble, and it outperformed Cambridge Associates' top quartile benchmark average annualized return of -19% and median benchmark average annualized return of -28% for the same time period. It also beat the Nasdaq composite, which posted a -37% annualized return for the same time period. Broken down by fund year, the funds' annualized loss was 15.9% for 1999; 24.4% for 2000; and 67% for 2001.
9.3% annualized return
The total $19.4 billion private equity program, known as the Alternative Investment Management program, generated a 9.3% annualized return since inception in 1990 through Sept. 30, according to the posting. It currently has 342 relationships, about 80 of which are in the Grove funds of funds. On a cash basis, the overall program has invested $6.5 billion since inception, returning $10.4 billion. After fees and other expenses, it has generated $4.4 billion in profits.
Clinton Harris, Grove managing partner, emphasized that the results of the 1999 through 2000 vintage venture funds aren't meaningful because most of the money hasn't yet been invested. In fact, every fund on the CalPERS' website that was started after 1998 has a "NM" (not meaningful) notation next to it, advising that it's too early to judge performance.
"In a normal environment, it takes three to four years to build a portfolio after raising a fund, and six to seven years until all the capital is invested. You won't know if a company will do well for three to four years. But 1999 was not a normal year. That year most funds built portfolios in two years, which is very fast," Mr. Harris said in an interview.
In addition, the economy has a big impact on how venture companies will do, he said. "Private companies can succeed if the economy turns around. It takes four to six years from inception to know how a fund is performing relative to its peer group. But you can't forecast absolute returns for six to eight years."
Not all bad
He added that even though 1999 was a terrible year for the asset class, some of the funds in the CalPERS portfolio that began that year were doing "OK." Those include Clearstone Venture Partners I-B, which invests in early stage companies and has returned $4.6 million, nearly twice the $2.5 million invested, and posted a 159% annualized internal rate of return; and TCV III, which invests in later-stage companies and has returned $6.7 million, or most of the $7.75 million invested, with an annualized IRR of 15.9%. He is also pleased with New Mountain Partners LP, a 2000 vintage year buyout fund that invests in a few large transactions. It has returned $332,500 of $20.8 million invested and posted an annualized IRR of 9.7%.
Mr. Harris also explained that general partners pay themselves management fees averaging 2.5% of assets committed before they even invest the limited partners' money, which further lowers internal return rates in the early days of a fund. CalPERS has committed $1.3 billion to the Grove Street program, but the funds in the portfolio had drawn down only $847 million as of Sept. 30, of which $100 million was for general partner fees and expenses, paring the portfolio's value to $642 million. Mr. Harris estimated that two-thirds to three-quarters of the -18% annualized return was due to the management fees.
The new CalPERS website also features an education component, where it notes that in the early years, private equity funds usually show low or negative returns. It doesn't mention the management fees but does explain "the J-curve effect," noting that "investment gains usually come in the later years as the companies mature. In the final years of the fund, the higher valuations of the businesses are confirmed by the partial or complete sale of companies."
And Brad Pacheco, spokesman for CalPERS, observed: "It is important that people keep these performance numbers in perspective. A large portion of our capital has not been invested and is available today to seek out better investments. We feel for the most part that we have missed the bubble."
The website lists every fund in the system's portfolio, breaking out how much money has been committed, invested and returned, in terms of both cash and IRRs.
Among non-Grove Street funds in the private equity portfolio, the older partnerships consistently outperformed the newer ones. Blackstone Capital Partners II, started in 1994, generated a 38.8% IRR, while Blackstone Communications I, started in 2000, posted a -57.6% IRR.
Carlyle Partners II, begun in 1996, posted an IRR of 27%, while Carlyle Venture Partners II, begun in 2001, posted an IRR of -8.1%. And the Thomas H. Lee Equity Fund III, begun in 1996, posted a 33.1% IRR, while the firm's newer Fund V, from 2001, posted an IRR of -19.8%.
One vintage 2000 fund that bucked the trend and performed very well was Hellman & Friedman Capital Partners IV, with an IRR of 15.5%. But more typical was Madison Dearborn Capital Partners IV, also started in 2000, with an IRR of -32.5%. n