Bill to keep CalPERS private debt documents secret fails

A CalPERS-backed state assembly bill that would have kept certain information and documents related to its private debt investments secret failed to pass the state Senate Judiciary Committee, killing the bill.

The bill would have exempted certain private lending-related documents and information from California's public disclosure laws, according to a July 11 analysis of the amended version of the bill by the Senate Judiciary Committee.

Officials at the $459 billion California Public Employees' Retirement System, Sacramento, are evaluating their next steps, which could include making what would be a third attempt to get a bill passed, CalPERS spokeswoman Megan White said in an email.

CalPERS wanted the legislation so that staff could make private debt investments and manage them in-house. CalPERS needs the exemption to be competitive with other private debt market participants, CalPERS interim CIO, Dan Bienvenue previously told Pensions & Investments.

By making such information public, CalPERS officials believe it would be difficult to attract "worthwhile private debt borrowers," the analysis said.

Pension fund officials will continue to invest in private debt through external managers, Danny Brown, chief of CalPERS' legislative affairs division, told the CalPERS board Wednesday.

Opponents of the bill, which included retiree organizations, principally the Retired Public Employees Association; certain environmental groups; the City of Pasadena; and the Howard Jarvis Taxpayers Association, argued that the bill would not provide adequate public information, according to the Senate Judiciary Committee analysis. California's public disclosure law already exempts "alternative investments," meaning investments in private equity funds, venture capital funds, hedge funds or absolute return funds, including proprietary due diligence materials and investment agreements, from being made public, the analysis said.

The Retired Public Employees Association unsuccessfully asked that the bill be amended to make the loan agreements public. CalPERS would not accept that amendment, Mr. Brown said Wednesday, which was the third day of the board's virtual offsite meeting.

Staff estimates that external management of private debt would cost $150 million in management and incentive fees for each $1 billion invested with an external manager over a five-year period, Ms. White said.

But for CalPERS to internally make and manage private debt investments, pension officials would have to "build out a team," which also would carry a cost, Mr. Bienvenue said.

CalPERS board Vice President Theresa Taylor on Wednesday questioned whether CalPERS could create an asset allocation that would meet its expected 7% rate of return without the ability to invest in private debt in-house.

Separately, the board plans to hold its next board and committee meetings, scheduled for Sept. 13, 14 and 15, in person, board President Henry Jones indicated Wednesday.

Separately, CalPERS’ new executive search firm, Dore Partnership, does not expect the pension fund to have a new CIO in place until March, according to a presentation to the board July 14.

CEO Marcie Frost expects to start the search process at the end of July or early August, conduct interviews in late summer and the fall, with final selection of a CIO in the fall or early next year, she said at the virtual meeting July 14.

Filling out the target timeline, Crawford Torell, a principal at Dore Partnership, said Dore executives expect the first round of candidate interviews by a subcommittee in September with a selection in early to mid-December.

“We only put early to mid-March as the candidate joining CalPERS as we know from experience that there are non-competition periods that can range from one to six months,” Ms. Torell said.

The timeline means that a new CIO would not be in place until four months after the board is scheduled to select a new asset allocation.

While it’s the board’s job to select the asset allocation, a key part of the CIO’s job is to advise the board on its asset allocation and manage the pension fund’s investments, according to CalPERS’ last CIO job posting.

According to information provided to the board on the first day of its meeting on July 12, Mr. Bienvenue told the board that he expected to complete the asset-liability management process with a new asset allocation in November, a month before a new CIO is selected under the target timeline.

Mr. Bienvenue said the new asset allocation could include an expansion of private equity and real asset allocations, a new private debt allocation and leverage added to the entire portfolio. The approaches are similar to approaches favored by CalPERS’ former CIO Yu “Ben” Meng.

During the discussion, Dore Partnership presented the board with five CIO criteria: relevant investment experience, leadership, communication, fitness for a public role and a sense of mission.

Dore executives told the board their data analysis showed that top-performing CIOs at other funds had been internal candidates.

Rich Hutton, a partner at Dore, who leads the firm’s engagement with the global asset management community, noted that 48% of asset owner CIOs whose plans earned a five-year annualized 7% rate of return or more had been promoted, with remainder being external candidates. Dore Partnership’s data showed that the average tenure of the organizations with returns of an annualized 7% return was 5.1 years.

“Putting these two datasets together ... it is clear that continuity is one of the key drivers” of investment performance, Mr. Hutton said.

During the discussion, a number of board members noted that there were very few diverse CIOs. Only 10 of the 100 pension plans, endowments, foundations and sovereign wealth funds in Dore’s dataset are female and just four are from historically underrepresented groups.

Betty T. Yee, California state controller and board member, said there may need to be some “trade-offs.”

“I think while the net will be cast wide ... this is a discipline where there is a severe underrepresentation” of historically underrepresented groups, she said.

Ms. Yee said that in order to consider a diverse set of candidates, she said she hoped the board would have the flexibility to look at non-CIO candidates who are “ready to ascend to a CIO position.”

Ms. Yee added that the candidate should have direct investment experience.

“We’ve seen a lot of candidates who have been ... around great investment teams,” but they have not had direct investment experience themselves, she said.

Charles Dore, founder and CEO of Dore Partnership, said his team is in general agreement with the board’s direction and that he would present Ms. Frost and her team with an updated copy of the CIO criteria to share with the board.

The CIO’s job criteria and the recruitment process do not need to come back to the board for a vote, Ms. White said.