CalPERS is ending its unique experiment as the sole limited partner of Health Evolution Partners Inc., a private equity firm that focuses on health-care companies.
The pension fund's private equity investment staff blocked already committed funds from being used and issued the firm an ultimatum — find another partner to buy out CalPERS or liquidate the entire fund, multiple sources say.
The issue came to a head in early April. CalPERS staff told HEP founder and CEO David Brailer the pension fund was going to end the partnership and block the San Francisco-based firm from making an additional $10 million investment in one of its portfolio companies, Optimal Radiology, which was experiencing financial difficulties.
Real Desrochers, senior investment officer, private equity, for the $300.6 billion California Public Employees' Retirement System, Sacramento, explained his decision to the board in closed session. Sources said he was convinced that poorly performing HEP would never realize its goal of delivering returns of 20% or more and that CalPERS needed to get out of the investment.
CalPERS made an almost unheard of bet in 2007, committing a total of $705 million to the firm headed by Mr. Brailer, a physician who had no private equity experience. Of the total, $505 million was to be allocated to the Health Evolution Partners Growth Fund, which was to invest in health-care companies poised for growth, and $200 million was slated for a fund of funds that would invest in other private equity funds investing in health care.
Mr. Brailer was the national coordinator of health-care information technology in the George W. Bush administration from 2004 to 2006. He maintained that the deal would make CalPERS a national leader in health-care investing and other institutional investors would join later.
CalPERS officials also planned to leverage information about health-care trends they learned from Mr. Brailer and his staff, helping them to make smarter decisions in providing benefits to employees.
The returns Mr. Brailer promised never happened, nor did other asset owners invest. The exchange of information to help the pension system deliver health-care benefits more efficiently also went by the wayside.
Mr. Brailer repeatedly told CalPERS officials they needed to give him more time to produce the double-digit returns, sources said. But he was unable to sway Mr. Desrochers.