CalPERS' investment committee on Monday approved the concept of creating outside entities as part of its new private equity investment model.
One portfolio to be managed by the outside entity, Pillar III, would make late-stage venture capital and growth equity investments in technology, life sciences and health-care companies, a report to the committee showed. The other outside entity, Pillar IV, would make long-term investments in core economy companies. The two direct portfolios are expected to grow to $10 billion each over a 10-year period.
Yu Ben Meng, CIO of the $354.8 billion California Public Employees' Retirement System, Sacramento, told the committee that the vote approving the concept was the first step needed before the staff could go out to the market to find private equity managers for the outside entities. The affirmation of the inclusion of the two pillars "will help ensure CalPERS is able to bring potential partners to the table," Mr. Meng said. Details of the proposal — including the governance of the outside entities, the amount of the commitments and cost, and the risks of the new way of investing in private equity — are yet to be determined.
During the meeting, Mr. Meng said Pillars III and IV "contemplate the formation of a new investment vehicle in the form of a limited liability company, an LLC. ... The management company we select will serve as the LLC's managing member."
CalPERS would not own the partnerships associated with Pillars III and IV. CalPERS would be a non-managing member of the LLC. CalPERS would help create a budget and make periodic payments in lieu of management fees, Mr. Meng said.
During questioning from investment committee member Margaret Brown, Mr. Meng and John Cole, senior portfolio manager at CalPERS who had taken the lead in developing the new CalPERS private equity investment model, indicated that CalPERS might set up more than two outside entities.
"I want to be very clear that as we go along — and we have gone to the market and understand what would be possible in both Pillars III and IV — the notion which we laid out initially of the long-term plan that talked about $10 billion committed over 10 years in each of the two pillars was meant to give a sense of what the future would look like, and as a result in simple terms, it came across or comes across as that might be done in a singular vehicle," Mr. Cole said. "We could choose to do multiple vehicles, but the idea would be to do it at a scale that ultimately would be that size."
The motion that passed the committee requires the staff to report at least quarterly on the progress of the private equity model including the costs. In addition, the staff will submit a prudent person plan and would not make any commitments for funding investments related to the outside entity portion of the private equity model without a final vote by the investment committee. If the staff needs to make commitments outside its delegated authority, staff will return to the investment committee to revise its investment policy.
Separately, Mr. Meng told the investment committee that the staff would report on private equity co-investments at its next meeting on April 15. The staff has been conducting an internal study on co-investments. Some 6% of CalPERS' $27.8 billion private equity portfolio is in co-investments and direct investments, but CalPERS stopped making co-investments a few years ago. Under CalPERS' new private equity investment model, officials plan to again invest in co-investments as well as separate accounts, and in secondaries.
In other action, the investment committee voted to oppose a California bill that would require CalPERS and the $226.5 billion California State Teachers' Retirement System, West Sacramento, to stop investing in private prison companies and to divest from companies that do not transition to another industry by July 1, 2020, subject to the fiduciary duty of the boards. CalPERS officials identified two companies that meet the bill's definition of a private prison company, Geo Group and CoreCivic, according to a staff report to the investment committee. As of Dec. 31, CalPERS officials estimated that CalPERS had a $10 million invested in Geo Group and CoreCivic equities. CalPERS has not yet determined whether it will voluntarily divest from Geo Group and CoreCivic.
The committee also approved a staff recommendation to support a bill — if it is amended — that would require CalPERS and CalSTRS to provide an annual report of its investment with emerging managers, including through a fund of funds. CalPERS' staff recommendation would support the bill if the bill's authors removed a requirement that each pension fund identify terminated emerging managers in its report.
"I don't think we should be evaluating in public, the reasons people are dismissed." said CalPERS board member Henry Jones during the meeting.
