The California Public Employees’ Retirement System has ended its relationship with emerging manager fund of funds Centinela Capital Partners, which has managed the system’s $1 billion domestic private equity emerging manager programme since 2006.
The portfolio, known as the Capital Link funds, will be managed by Credit Suisse, according to a spokesperson with CalPERS. Earlier this year, CalPERS awarded Credit Suisse a $100 million mandate for new commitments to domestic private equity emerging managers. Centinela had vied for that mandate but lost in a competitive bidding process, according to documents obtained by Private Equity International in a public records request earlier this year.
However, Centinela was still running the $1 billion portfolio it had built up since 2006. CalPERS’ termination of Centinela’s contract – technically a no-fault termination, which several sources called “the nuclear option” – means the fund of funds must relinquish control of the Capital Link funds.
“In the current market environment we have had to make some tough decisions about our partners to improve the long-term performance of our fund,” a CalPERS spokesperson said. The emerging managers programme overall – including private equity – has had “mixed” results and “underperformance”, the system said in its emerging manager five-year plan, which was released in August.
Information available on CalPERS' web site shows that the $500 million Capital Link Fund I has, as of 31 December, 2011, generated a 7.2 percent internal rate of return and a 1.2x multiple. Fund II, also a $500 million vehicle, was producing a .6 percent IRR and a 1x multiple as of the same date, according to CalPERS. More updated numbers were not available as of press time.
Some of the individual managers within the Capital Link funds have been top performers. Clearlake Capital Partners’ second fund, for example, was generating a 1.4x and a 48.4 percent net IRR, and Vista Equity Partners third fund was producing a 2x multiple and a 28.6 percent IRR.
Earlier this year, Centinela brought claims against CalPERS for alleged breach of contract and racial discrimination to the California Victim Compensation and Government Claims Board. The board denied the claims in a June ruling, but recommended Centinela pursue its claims in court.
In part, Centinela claimed CalPERS promised to award the firm the $100 million emerging managers mandate, essentially for a Capital Link III fund, if the firm removed founding partner Cesar Baez. CalPERS allegedly had become concerned about some of Baez's relationships with “Latino” placement agents accused of wrongdoing involving CalPERS, even though neither Baez nor Centinela was ever accused of wrongdoing.
After Centinela complied, CalPERS allegedly reneged on its promise, the firm claimed. “Centinela has been damaged by CalPERS' wrongful actions,” the firm said in its claims filing.
In the current market environment, we have had to make some tough decisions about our partners to improve the long-term performance of our fund.
CalPERS did not directly respond to the claims, but the spokesperson said the system has been a leader in developing emerging managers programmes. In the last three years, the system committed about $1 billion in emerging managers strategies across private equity, real estate, global equity and hedge funds, the spokesperson said.
Several people in the emerging private equity manager community told Private Equity International in recent interviews that they believe CalPERS is largely abandoning its emerging private equity manager strategy, choosing to put more money with fewer, larger managers from whom they can get choice economics like lower fees.
These people point to the $100 million mandate awarded to Credit Suisse, which compared to the $1 billion programme the system built under Centinela, and compared to CalPERS’ overall assets under management, is
However, CalPERS has publicly affirmed its support for the strategy. “While most of our investments are with a half-dozen or so major global partners, we want to ensure that we don’t overlook emerging managers and their prospects for high rates of growth and performance,” a CalPERS spokesperson said in a prior interview.
In fact, the system put out its five year emerging manager plan in August to outline how it will restructure and manage the overall programme going forward. As of 30 June, 2011, CalPERS had almost $10 billion invested with more than 300 emerging managers across asset classes.
CalPERS, along with the California State Teachers’ Retirement System, has a chance to discuss their efforts with emerging managers at a hearing set for Thursday. Two California politicians, State Senator Gloria Negrete McLeod and State Senator Curren Price, have convened the hearing to focus on access to institutional funds and how the pension systems are addressing issues that have traditionally held smaller firms back, according to information about the hearing. Senator Price did not return a request for comment.