The California Public Employees’ Retirement System recently revealed the first commitment from its debut emerging private equity manager mandate being run by Credit Suisse Customized Fund Investment Group.
Credit Suisse committed $9.6 million on behalf of CalPERS to Siris Capital Group’s debut fund as a spin-out from SAC Capital Advisors, the mega-hedge fund that once had a private equity operation. The fund, called Siris Partners II, closed on $641 million earlier this year.
CalPERS awarded Credit Suisse the emerging private equity manager mandate last year to invest $100 million over the next three years. Credit Suisse took over for CalPERS’ former private equity emerging managers fund of funds Centinela Capital Partners, which the retirement system fired last year.
Credit Suisse got the $100 million mandate and also responsibility to run two portfolios put together by Centinela, called the Capital Link funds. Funds I and II, comprising $1 billion, included managers on their first or second funds, and also diverse and women-owned firms (though CalPERS is prohibited by law to make investment decisions based on race or gender).
Capital Link Fund I was generating a 9.1 percent internal rate of return and a 1.3x multiple as of 30 September, 2012, according to CalPERS performance information. Fund II was producing a 4.5 percent IRR and a 1.1x multiple as of the same date.
CalPERS also revealed that one of the managers in the Capital Link portfolio had “graduated” into a direct commitment from the system. CalPERS made an undisclosed, direct pledge to Clearlake Capital Partners III, a more than $785 million fund that closed in January. Clearlake’s second fund is in the Capital Link portfolio.
Diverse managers outperform
CalPERS completed an emerging manager survey recently, in which it found that the diverse private equity managers within its emerging manager fund of funds portfolios generally outperformed non-diverse managers. The study found that both emerging managers and diverse managers to whom the system committed directly underperformed non-emerging and non-diverse managers.
The survey showed that CalPERS appears to do better when it commits to diverse managers through an external
We don't know yet if the positive performance of diverse managers is wiped out by the extra layer of fees or not, and it will take time for us to figure that out.
However, CalPERS wants to get a better understanding of how the fees charged by fund of funds may cut into the positive performance by diverse managers, according to Laurie Weir, a CalPERS portfolio manager who leads the system’s policy and programme development for environmental, affordable and workforce housing, emerging manager and responsible contractor initiatives.
“We don’t know yet if the positive performance of diverse managers is wiped out by the extra layer of fees or not, and it will take time for us to figure that out,” Weir told Private Equity International in a recent interview.
CalPERS “has been focused on cost for some time”, and this focus on emerging manager strategy costs “is consistent with our seeking increased understanding of costs generally across the portfolio”, Weir said.
A study last year by the National Association of Investment Companies, which represents primarily diverse private equity managers, showed NAIC members generated a cumulative median net internal rate of return of 15.2 percent and a 1.5x multiple from 1998 to 2010. The study showed NAIC members’ performance beat that of US buyout firms during the same time period, which produced a 6 percent median net IRR, according to the study, which was compiled by KPMG.
The system has been accused of pulling away from emerging manager strategies, at least within private equity. Critics cite the system’s $100 million mandate over three years as a huge reduction of the support CalPERS had for emerging private equity managers, which ramped up to around $1 billion from 2006 through 2009, but then stagnated after the global financial crisis.
However, CalPERS committed about $7 billion to private equity from 2006 to 2008, with about 18 percent of that going to emerging managers. After Lehman Brothers filed for bankruptcy and the US economy collapsed, CalPERS committed about $1 billion to private equity from 2009 to today. CalPERS again used about 18 percent of that total commitment on emerging managers, a CalPERS spokesperson said.
“The fact that both of those numbers are 18 percent – it is in fact a coincidence but an interesting coincidence,” Weir said. “It illustrates CalPERS’ continued and unwavering commitment to deploying capital to emerging managers.”
CalPERS meanwhile has been contending with blowback from its decision to terminate its relationship with Centinela last year. The firm’s founder, Cesar Baez, sued the retirement system in March for alleged racial bias. Centinela, which is headed by Robert Taylor and Fidel Vargas, has not commented on the situation.