CalPERS is looking for a few growing money managers to fill a new transitional program.
The $323.6 billion pension fund's new effort focuses on firms that are too big to be part of its emerging manager program but too small to be in its regular manager lineup.
The move comes as the Sacramento-based California Public Employees' Retirement System struggles to find new sources of investment return. Economic forecasts show the most the pension fund can expect to make from its overall portfolio over the next decade is an annualized 6.2%, 80 basis points below the 7% annualized return it has set for itself beginning July 1, 2019. CalPERS' funding level is 68%.
"In the future, the alpha is going to be delivered by the smaller, not the megabillion-dollar firms," said Clinton Stevenson, the investment director of CalPERS' investment management engagement program, in an interview. Mr. Stevenson said smaller firms are more agile than older larger firms and often have new investment ideas.
The retirement system has set aside $7 billion to give to smaller public equity, private equity and real estate managers eligible to graduate from its emerging managers program or that have made a name for themselves managing money for others. It issued the first solicitation for proposals on July 11.
Currently, emerging managers invest around $8 billion for CalPERS, much of it through manager-of-managers firms for public equities and funds of funds for private equity.
CalPERS current guidelines require its public equity account emerging managers to have less than $2 billion in assets under management, with the pension fund allocating generally between $75 million and $150 million to each firm. Private equity emerging managers must be raising their first or second fund and are limited to commitments from CalPERS of $8 million to $20 million. The firms cannot receive direct CalPERS commitments. Real estate emerging managers must be sponsoring their first through third fund and manage less than $1 billion; they receive commitments of between $50 million and $150 million.
Under the new transition program, equity managers could have between $2 billion and $15 billion in total AUM; private equity firms can be raising their third through sixth fund; and real estate managers, their fourth through sixth fund. The allocations from CalPERS also increase under the transition program. Equity firms can be given up to a $1 billion; private equity firms can receive direct commitments of $50 million to $400 million for individual funds they are raising; and real estate managers can obtain commitments of up to $300 million.
In its current manager solicitation, CalPERS is seeking five global equity managers, each of which would receive up to about $500 million, and five private equity managers that are raising funds of at least $100 million. Mr. Stevenson said a second solicitation planned for 2019 will include opportunities for real estate managers.
CalPERS' search comes as another major public pension plan, the $192 billion New York State Common Retirement Fund, is also considering a transition program to fill the gap between emerging managers and managers with full commitments.
Sheryl Mejia, director of emerging managers for the Albany-based fund, said such a program has the support of Chief Investment Officer Vicki Fuller and New York state Comptroller Thomas DiNapoli, the pension fund's sole trustee.