Filling CalPERS' top investment job has been notoriously challenging. The CIO faces scrutiny from a 13-member governing board, transparency requirements imposed on public employees and a salary that can be less than half that of peers in the private sector. It took 18 months to name the pension's most recent CIO, Nicole Musicco, following the abrupt resignation of Ben Meng in August 2020.
Then there's pressure of meeting the pension plan's 6.8% annual return target. If it falls short, municipalities across California could be forced make up the difference and even cut services to meet obligations. The fund earned 5.8% last fiscal year, a sharp turnaround after a 6.1% loss in the prior year that was its worst showing in more than a decade.
"There's a type of personality that actually appreciates being in the public eye, frankly, and having $460 billion, they get to have a view point," Frost said in the interview Oct. 10. "So that's the type of person that we are looking for. Again, there may not be a lot of them, but CalPERS has a draw."
Frost's comment comes as the pension fund looks to reduce its stock portfolio and expand further into private credit. In the coming months, CalPERS will consider increasing its private credit exposure to 9% from 5% of the fund's total portfolio — a jump of around $18 billion.
Under Musicco and Meng, CalPERS was already expanding its private equity as it faced pressure to meet its return target. The fund in the last fiscal year increased its private equity bet by $25 billion to $60 billion, and they may increase it further, Frost said.
CalPERS could increase private equity weight in the portfolio from 13% to 18% if the investment team "felt like they had the appropriate deal flow," Frost said. "I think having a CIO who has a background in private assets will continue to be part of the credentialing of the next CIO."
Still, steering the fund toward private assets will require more staffing and may face challenges. Musicco, who stepped down last month, citing a desire to focus on her family, wanted CalPERS to pursue ownership stakes in sports teams and explored a deal with the Sacramento Kings professional basketball team. The strategy resulted in some internal pushback from staff.
Private equity returns were negative in the last fiscal year as high interests rates ended years of easy money for deal-makers. The pension fund's governing board is weighted toward major labor unions, which are critical of private equity deals that strip companies for profits and put workers' jobs at risk.
"I don't know that there are any other seats on a U.S. public company or pension plan that has the same transparency and visibility," said Frost. "Some people are wired for it — and some people don't know if they are wired for it. Or they think they are wired for it until they actually sit in the seat."