CalPERS' investment committee on Monday agreed that it will continue backing its general investment consultant Wilshire Associates after the firm's sale to two private equity firms, Motive Partners and CC Capital, is completed.
Ares Management Corp. is providing the financing for the deal. The transaction is scheduled to close in December. The committee agreed to transfer its contract with Wilshire to the new owners.
"The issue in a nutshell is that once the transaction closes, Wilshire will be owned by two private equity firms and other confidential investors," Matthew Jacobs, CalPERS' general counsel, told the committee. "This raises a potential conflicts-of-interest issue that the board should consider in deciding whether to consent to the requested assignment."
Mr. Jacobs said later in the meeting that one of his biggest concerns is that Wilshire was implementing new policies including a conflict of interests policy that Wilshire shared with the committee in draft form.
The new policies could provide "the board some comfort," he said. But he added, "we don't really know how they're gonna work in practice."
Investment committee Vice Chairman David Miller said although he "never lacked confidence" in Wilshire's advice, the perception of conflicts of interest or impropriety is very challenging. Approving the transfer of the contract could put Sacramento-based CalPERS in a position that it would have to sell the deal to stakeholders.
Board President Henry Jones added that the timing could not be worse since the $428.4 billion California Public Employees' Retirement System was about to embark on an asset liability study next year, among other matters.
Ashley Dunning, partner at law firm Nossaman, CalPERS' fiduciary counsel, said the question is whether Wilshire can comply with its fiduciary obligations in light of a new ownership structure.
She later said that "by signing the consent, I believe you are consenting to the transaction."
However, she added that "if your conclusion as fiduciaries is that you'll get unconflicted outstanding advice from Wilshire," the possibility that stakeholders and others may look askance at the relationship should not hold it back from consenting.
Lynn Paquin, representing California Controller and CalPERS board member Betty T. Yee, said there is "a lot of reputational risk for CalPERS, especially as we embark on the ALM (asset liability study) process next year."
Wilshire executives assured the committee that its consent does not lock CalPERS into anything additional or change the terms of its contract. They also noted that of Wilshire's more than 250 advisory relationships, not one of its clients declined to provide consent for fear of reputational risk.
Wilshire has been CalPERS consultant for about 35 years. It's contract is set to expire in June 2023.
