CalPERS gets green light on ‘direct’ programme

Staff at the US's biggest public pension won approval for its proposed programme ‘in concept’ and will need to go back to the board with proposed partners and investment opportunities.

After 18 months of discussions and revisions, the investment committee of the $354 billion California Public Employees’ Retirement System approved on Monday the addition of two ‘direct’ private equity strategies, Pillars III and IV (the Innovation and Horizon strategies) to its strategic business model.

Ten board members voted in favour, with Margaret Brown, Jason Perez and Betty Yee voting against the motion.

Here’s what the vote means for CalPERS in the near-term:

CalPERS is not issuing an RFP

CalPERS will not be issuing RFPs for investment partners. For now, no investment contracts will be signed, and no commitments made to Pillars III and IV. Staff will continue with the next phase of the project: identification and successful negotiation with partners.

Plans for Pillars III and IV have yet to be firmed up, and each could have multiple managers, potentially under the current $2 billion delegated authority (staff can commit up to $2 billion without requiring board approval). However, the staff committed to coming back to the board for any decisions on the new structures.

The CalPERS staff will provide an “independent prudent person opinion” from an independent third party for a commentary on the final implementation and funding plan. This could come from the pool of consultants currently engaged with CalPERS.

As discussed at previous board meetings, CalPERS will not own the partners selected for its Pillars III and IV. It will form a new captive investment vehicle in the form of a limited liability company, and the managers hired for the pillars will serve as the LLC’s managing members. CalPERS will not own or control the management company, either.

CalPERS expects to save on fees

CalPERS said the investment vehicles’ structure will mean it saves on fees. In lieu of a management fee, CalPERS will make periodic payments based on a pre-approved budget to fund the operations of the investment vehicle and the management company. The management company will also earn an appropriate long-term economic incentive that will help align the investment partners with CalPERS’ interests.

Meng reiterated that, in addition to the same information they receive from commingled funds, CalPERS staff will receive detailed portfolio company information, full details of costs and budgets, and detailed investment pipeline information, as well as periodic meetings between staff and investment manager. Public disclosure will be the same as the traditional disclosure CalPERS makes on its private equity investments.

The timeline is still unknown

The timeline for full implementation of the two pillars, which could have investments of $10 billion each, is still unknown and dependent on identification and successful negotiation with capable partners.

There will also be changes to Pillars I and II

Under the new plan, Pillar I, implemented as a fund of funds structure by Grosvenor, will increase its emerging manager mandate to $500 million from $100 million and be able to make commitments to emerging managers’ third funds. It will also be able to co-invest alongside emerging managers.

CalPERS staff will be tabling its internal study on co-investments, Pillar II in the new plans, for the April meeting.