The Deeper Issues of the CalPERS Private Equity Failure
I was going to continue my critique of CALPERS’s private equity team because there’s much about the presentation at the most recent Investment Committee by the Chief Investment Officer, Managing Investment Director of Private Equity, and Investor Director for Private Equity that was simply incorrect. However, there’s a more important point that’s been bothering me ever since Naked Capitalism directed my attention to the video of the meeting.
Shortly after North Carolina enacted a law in 2001 to allow the public pension to make significant investments in private equity, former Treasurer Richard Moore encouraged me to contact the private equity team at CalPERS. He wanted to know everything I could find out about how CalPERS developed policies, negotiated deal terms, and conducted due diligence. The CIO and staff (all of whom left CalPERS many years ago) were extremely generous with their time and shared all sorts of documents. Treasurer Moore was eager to absorb this information because CalPERS was perceived to be the leading public fund investor in private equity with over a decade’s worth of experience.
Over the years, many institutional investors have looked up to CalPERS as a leading authority on investment policy, due diligence, and transparency. If CalPERS signed on to a particular private equity fund, many investors assumed that the legal documents and economic terms had been aggressively and competently negotiated. For small institutions and public funds with limited resources, CalPERS’s involvement in private equity was a source of comfort.
The performance of Ted Eliopoulis, Réal Desrochers, and Christine Gogan before the Investment Committee at the August and prior meetings has greatly undermined CalPERS’s reputation. To be clear, I am not talking about CalPERS’s ability to select top performing private equity funds. I don’t think there are many investors who can put together a portfolio of top performing funds. There’s simply too much luck (noise) involved in predicting which funds will perform well in the future. Moreover at CalPERS’s immense scale, the best CalPERS can hope for is to build a portfolio of private equity funds that delivers market performance. In order to build a $30 billion private equity portfolio, CalPERS has to select so many managers and funds that it is virtually impossible to generate anything more than the market’s overall return for the asset class.
Like any large investor, CalPERS must systematically attack every sort of fee and vigorously negotiate deal terms. These are the only two techniques that can give a large institution marginally better performance and control over its private equity program. Clearly, the current team at CalPERS has failed to do both. As Naked Capitalism points out, the investment team is still under the illusion that it can generate superior performance.
For those of us who think it is important for institutional investors to stand up to private equity, the developments detailed by Naked Capitalism are very bad news.