During the review of the private equity investment business model, CalPERS staff has provided regular updates to the investment committee, which can decide whether or not to fund the revised business model, Mr. Cole noted in a separate interview.
Currently, CalPERS mostly invests in commingled funds, with smaller investments in co-investments, secondaries and direct investments.
Most of that work is being done by staff on its own, under authority delegated to it by the investment committee, he said.
Staff will need to return to the investment committee to seek an exemption and/or change in its delegated authority to commit larger amounts of capital to the two proposed partnerships. They are expected to return to the board by early next year.
CalPERS' private equity plan has been evolving since officials went public with bits of its plan earlier this year. In May, CalPERS had envisioned a separate corporate-like structure with one board overseeing CalPERS Direct strategies. Its new plan specifies that each partnership will have its own advisory board, Mr. Cole told the pension fund's investment committee.
One of the partnerships would run an innovation strategy, dedicated to investing "in late-stage venture capital, at the nexus of life sciences, health care, and technology," Mr. Cole said. It would make commitments of $1 billion to $2 billion a year.
The second partnership would make long-term investments without an expiration date. This so-called horizon portfolio would focus on "core economy companies … with durable business models, capable of attractive cash yields over time with the opportunity to grow revenues by taking advantage of longer-term investments and a platform approach to building a portfolio," he explained. CalPERS would make larger, less frequent commitments to the second partnership. The size of these multiyear commitments has yet to be determined.
The two outside partnerships would be the general partners and funded by CalPERS, which, at least in the beginning, would be the sole limited partner. Nor would CalPERS have a seat on either of the partnerships' advisory boards or own a slice of the general partnerships, Mr. Cole said in the interview. CalPERS' investments in the partnerships are expected to grow to $10 billion each in 10 years, he said.
To get the partnerships up and running, CalPERS would commit some capital upfront for executives at the two partnerships to hire the rest of the team and begin investing, Mr. Cole said in the interview.
The plan eliminates the need for the investment teams to have to go out and raise capital, he explained.
Rather than pay management fees based on the partnerships' assets under management, the partners would agree to "an appropriate and competitive operations budget that would allow them to do their jobs ... but no more," Mr. Cole said. The reason is to establish a better alignment of interests between the outside partnerships and CalPERS.
CalPERS could not provide information on what it intends to pay in performance fees.
"As the numbers have grown and limited partners have been forced to pay a percentage of assets in management fees, management fees are becoming a windfall ... a profit," Mr. Cole said. An operations budget brings management fees back to their original purpose, which was to give private equity firms money to do their jobs, he said.
CalPERS' clout with the outside partnerships would come from being the sole limited partner, he said.
"They will be focused on creating value for one master (CalPERS)," he said. The partnership would need to align their compensation and mission with CalPERS.
A CalPERS spokesman said CalPERS could not veto investments other than not committing capital for a particular period of time.
Another difference in the private equity investment model from the earlier version is that CalPERS has jettisoned the idea of outsourcing much of its current, mostly commingled fund portfolio to a single manager. Under the new investment model, CalPERS' commingled fund portfolio also includes co-investments, separate accounts and secondaries.
As of June 30, CalPERS had $18 billion, amounting to 66% of its private equity portfolio, in funds, $2.7 billion (10%) in fund-of-funds, $2.5 billion (9%) in co-investments and direct investments and $4 billion (15%) in separate accounts, according to its latest private equity report.
Now, Mr. Cole said, instead of outsourcing management of that portfolio, CalPERS staff could hire a firm in an advisory role to assist staff with the portfolio.
