CalPERS seeks to restart private equity co-investments

Co-investing by the US's largest public pension has stalled due to challenges around speed of execution.

Staff at the California Public Employees’ Retirement System are seeking board approval for a quick turnaround on co-investment decisions to help build out its private equity co-investment strategy.

A lack of speed has prevented the $362 billion pension from executing on co-investment opportunities, board member Dana Hollinger said at a 15 April investment committee meeting.

Pillar II – one of CalPERS’ four revamped private equity business models for directs, co-investments and fund commitments – focuses on private equity co-investments.

Pension fund staff were set to present details of the strategy – including due diligence methods and plans for mitigating portfolio concentration – during the closed committee session late on Monday.

In March, CalPERS received investment committee approval to move ahead with planning Pillars III and IV, its direct programmes that will invest in late-stage venture capital and core economy companies. It also intends to expand its emerging managers programme in  Pillar I.

For CalPERS, which does not currently make co-investments, previous co-investments and direct investments accounted for 8.4 percent of the net asset value of its $27.6 billion private equity portfolio as of 31 December, according to a presentation. Co-investments were executed with the largest manager relationships including Blackstone, Carlyle Group, CVC Capital Partners, Apollo Global Management and TPG.

The $2.34 billion co-investments/direct investments portfolio returned 17.4 percent over three years, 9.3 percent over five years and 15.3 percent over 10 years as of 31 December, the presentation showed.

General partners traditionally want to co-invest with limited partners that have managed a co-investment portfolio and have a proven track record and capability, chief investment officer Ben Meng said during the meeting. GPs today want co-investors who can add more than just financial capital, he added.

Meng cited the example of Valor Equity Partners, an early-stage food and retail private equity firm, offering Starbucks a co-investment opportunity. The GP would benefit from Starbucks’ knowledge in retail and mass distribution and Starbucks would accelerate its understanding of the new trends in food and retail.

“You can see it is a very good marriage,” he said.

Meng also drew attention to Amazon’s reportedly teaming up with the Yankees baseball team to buy the YES Network, a regional sports channel, from 21st Century Fox. The deal would allow Amazon to increase its distribution and stream all Yankees games.

CalPERS staff outlined the level of involvement required for various co-investment strategies. Syndication requires the least resources and staff engagement, followed by co-underwriting, and finally co-sponsored deals, which require the highest staff engagement; each of these approaches would afford more information and transparency.

The staff also approached 10 of its global peers with active co-investment programmes and found that they all began with syndications, Meng said.

One CalPERS peer had migrated to co-underwriting deals where LPs do not get involved in the transaction until the deal is signed. Three of its global peers had evolved to become co-sponsors, where the LP comes into the co-investment process as early as the deal sourcing stage.

Co-investments are a challenge, and one of the three that had migrated to co-sponsorship had returned co-underwriting, Meng said.