Under CalPERS' plan, the first of four private equity pillars would consist of commingled funds, co-investments and separate accounts; a second pillar would hold an emerging manager fund of funds; a third pillar would set up but not own one or more limited liability companies to make late-stage venture capital and growth equity investments in technology, life sciences and health-care companies; and a fourth would set up but not own one or more LLCs to make long-term investments in core economy companies.
"We expect these new vehicles (Pillars III and IV) to improve our ability to deploy assets in private equity opportunities, so we can invest more in private equity, and over time, to lower costs as well as improve both CalPERS' level of control over and the transparency concerning our private equity exposure," Mr. Meng said.
CalPERS' investment committee approved the third and fourth pillars in concept at its March 18 meeting. However, Mr. Meng said many of the details, including the commitment amounts, governance structure, the new model's cost compared to the current model, and exit strategies for the limited liability companies' investments have yet to be determined.
"I think in this world, you're either an LP or a GP. It's very difficult to be both," said Antoine Drean, Paris-based founder and chairman of secondary market placement agent Triago. "Each time things are booming, LPs look to become GPs" by direct investing or co-investments.
Before the global financial crisis, some asset owners also began investing directly. But they retreated back to commingled funds when investing became difficult during the crisis, Mr. Drean said.
CalPERS is waiting to nail down the specifics of its model for the next steps of its process, Mr. Meng said. In the meantime, the recent investment committee vote gives staff the ability and the board's support to negotiate with potential partners for the LLCs. The investment committee will have to approve funding for the LLCs and investment policy changes, including increasing staff's delegated commitment sizes.
Those details will be determined after staff starts shopping the LLCs in the market, he said. And the investment office will negotiate with potential private equity partners on two new business models, he added. Also to be determined in the next steps is whether CalPERS will be partnering with an executive, a team or a private equity manager, Mr. Meng said.
While Mr. Meng refers to the limited liability companies as a sort of captive manager, the approach is different from the one taken by some of the larger Canadian pension plans. Asset owners such as the C$368.5 billion ($276.2 billion) Canada Pension Plan Investment Board and C$193.9 billion Ontario Teachers' Pension Plan, both out of Toronto, have internal money managers run by their staff that invest directly in alternative investments, including real estate, private equity and infrastructure.
At the March meeting, Mr. Meng said that while all private equity investment strategies are on the table, CalPERS officials do not currently plan to adopt the Canadian model and bring its private equity portfolio in-house.
"Regarding the Canadian model, we evaluated that option and it is clear that it's not available for us at this time," Mr. Meng said. "We must learn how to walk before we can run. CalPERS, as of today, simply does not have the organizational structure nor the compensation options capable of matching what top-tier managers can secure in the private sector."
What's more, CalPERS is not located in a global financial center, "which seriously hinders our ability in attracting and retaining the top talent," Mr. Meng said.