Centinela sues CalPERS, Dear

The emerging manager-focused fund of funds is seeking damages for alleged racial discrimination and breach of contract by CalPERS, CIO Joe Dear and 20 individuals attached to the retirement system.

Centinela Capital Partners has claimed the California Public Employees’ Retirement System, its chief investment officer Joseph Dear and 20 unnamed individuals connected to the pension damaged the firm’s business through racial discrimination and breach of contract.

Centinela, a fund of funds focused on domestic emerging private equity managers, filed a lawsuit against CalPERS, Dear and the 20 anonymous individuals on 27 March in California Superior Court in Los Angeles. The firm accused CalPERS of breach of contract, promissory estoppel and racial discrimination, and is asking for at least $35 million in damages.  

CalPERS breached an oral contract it entered with the firm in 2011 when it promised if Centinela ousted its chief, Cesar Baez, the retirement system would grant the firm a $100 million emerging manager mandate, according to the lawsuit. Centinela complied, but CalPERS then forced the firm to submit its bid in a competitive process and allegedly changed the criteria to ensure Centinela would lose, the lawsuit said.

History has shown, time and again, that even institutions with noble missions make mistakes, or worse, use their status and resources to ignore harmful behavior, or worse still, use these to cover up bad behavior and the harm inflicted.

Robert Taylor and Fidel Vargas

The firm also has accused CalPERS of racial bias in allegedly linking Baez to certain “Latino” placement agents that had been under investigation by various agencies at the time, even though Baez was never accused of wrongdoing and had never done business with the agents in question, according to the lawsuit.

The alleged contract breach and racial discrimination damaged Centinela’s business and reputation, led to a loss of fees and profits and drove down the firm’s value and hindered its ability to continue operations, according to the lawsuit.

Centinela partners Fidel Vargas and Robert Taylor said in a statement made available exclusively to Private Equity International this week they had no choice but to file suit against CalPERS.

“History has shown, time and again, that even institutions with noble missions make mistakes, or worse, use their status and resources to ignore harmful behavior, or worse still, use these to cover up bad behavior and the harm inflicted,” said Vargas.

Taylor said in the statement: “We decided to challenge ‘goliath’, because CalPERS’ actions and our upbringing leave us no choice.”

CalPERS, in an email statement Tuesday, denied the charges and said it rejected Centinela, in part, based on the firm’s “failure to meet its commitments to CalPERS and satisfy CalPERS’ performance expectations”.

“Centinela was one of many external managers with whom CalPERS chose not to provide new rounds of

Cesar Baez

investment funding,” CalPERS said. “CalPERS believes the suit is completely without merit and looks forward to vigorously defending these spurious claims in court.”

Ousting its leader

Centinela’s lawsuit was filed a few months after the firm’s former chief executive, Cesar Baez, filed his own suit against the retirement system also alleging racial bias and damage to his business.

The firm, formed in 2006, had filed a complaint with the California Victim Compensation and Government Claims Board last year. The board denied the claim and recommended Centinela take its case to court.

The events in the lawsuit, much like those described in Baez’s filing and Centinela’s earlier complaint, began in 2009 when CalPERS and Centinela began negotiating for a renewed emerging private equity manager mandate. CalPERS had awarded Centinela about $1 billion to invest in domestic emerging private equity managers starting in 2007, and the firm had built an investment programme known as Capital Link funds I and II.

Robert
Taylor

Negotiations broke down in early 2011 after CalPERS allegedly became “uncomfortable” with Baez, and demanded his removal before making any kind of re-investment.

Later in 2011, CalPERS’ recently hired head of private equity, Real Desrochers, argued the system should not award the re-up to Centinela because the firm had not achieved “market validity” by attracting other LPs, according to internal documents obtained by PEI in a records request last year.

CalPERS eventually awarded the mandate to Credit Suisse’s Customized Fund Investment Group last year, and also terminated its contract with Centinela, handing over control of the Capital Link funds to Credit Suisse. Those funds have been generating a 9.1 percent internal rate of return and 1.3x multiple, and a 4.5 percent IRR and 1.1x multiple, respectively, as of 30 September 2012, according to the system’s own performance numbers.

Broader issues

Centinela’s situation helped fuel growing tensions between CalPERS and the private equity emerging manager community last year. Many in the emerging manager community felt CalPERS was abandoning its support of the small corner of the industry, to which it had once been one of the anchor backers.

Centinela was one of many external managers with whom CalPERS chose not to provide new rounds of investment funding. 

CalPERS

Critics cited CalPERS’ $100 million mandate (compared to $1 billion in prior years), arguing it was a sign the system was backing off from the community in favour of larger, bigger name managers from whom it could get choice economics.

The escalating situation resulted in CalPERS last year skipping the premier event in the emerging manager community, the annual Robert Toigo Foundation gala, and culminated in a public hearing hosted by two California state senators examining CalPERS’ emerging manager activities.

CalPERS has maintained it supports emerging managers, having over the years committed about $10 billion to more than 300 emerging managers, of which about $3 billion is managed by diverse firms.

The system also recently revealed the first commitment from its $100 million mandate: $9.6 million to SAC Capital

Fidel Vargas

Advisors spin-out Siris Capital Group. Also, CalPERS revealed it had “graduated” Clearlake Capital Partners, a manager from its Capital Link programme, into a direct commitment – the ultimate outcome for a manager in the programme.

As far as Centinela’s lawsuit, Taylor and Vargas believe “they owe that fight for accountability to every up-and-coming minority and female-owned business”, according to the statement, sent by their attorney Carl Douglas.

“They feel they owe it to the members of their firm and the funds they managed well for CalPERS. They feel strongly that they owe it to their own respective African-American and Latino communities”, according to the statement.