Decoding the CalPERS request for information

After rumours the US’s largest public pension fund was planning to outsource its private equity business, CalPERS has launched a search for potential partners. Here’s what we know so far.

The $326 billion the California Public Employees’ Retirement System is exploring moving some or all of its $40 billion private equity programme out-of-house.

In September Bloomberg reported CalPERS was talking to asset management giant BlackRock about taking on the task. But right before the industry disappeared for the holidays, CalPERS sent out a request for information for a private equity strategic partner, plus a questionnaire for potential partners to fill out.

Here are the highlights.

– It’s not open to everyone

In the document, CalPERS wrote “the process is very targeted, and will only be open to those that CalPERS invites to participate in the process”. It is unclear which firms have been invited to participate.

CalPERS declined to comment further, citing the solicitation’s active status.

– There isn’t much time

The solicitation opened on 21 December 2017 and will close at 5pm PST on 19 January.

The fact that CalPERS launched such a major process over the Christmas and New Year period has not escaped criticism, and the critics have a point. The questionnaire asks for detailed information on, among many other things, the firm’s approach to the due diligence process, deal pipeline, negotiating and monitoring across all relevant investment strategies, a detailed compensation structure and a “proposed dollar amount of firm capital which would be invested alongside CalPERS”. Not information that can be pulled together at the last minute.

– It’s not clear how this fits with other recent proposed changes

Last year, CalPERS said it was considering moving its private equity allocation to sit in a “growth bucket” within a wider allocation to equities. The idea behind this was to take pressure off the private equity team to meet a specific target allocation, allowing it to focus solely on committing to the best managers. It’s not clear whether CalPERS sees these two potential plans – outsourcing private equity, and moving it into a growth bucket – ­ as complementary or an either-or situation.

A CalPERS spokesperson said the solicitation is part of the fund’s “ongoing review” of the private equity programme, and that CalPERS will “spend a good part of 2018 continuing to explore strategic options”.

– Co-investment is a big part of the plan

The document asks respondents to include a proposal for a partnership that only covers co-investments, as well as a partnership covering co-investments, funds, separately managed accounts and secondaries. This confirms CalPERS is also considering outsourcing only a portion of its private equity portfolio.

The pension plans to make new commitments of $7 billion to $10 billion annually, and intends to “significantly” grow its co-investment portfolio, with annual allocations potentially reaching “$2 billion or more”. The institution also expects to grow its SMAs and secondaries participation “by material amounts opportunistically”.

The emerging and transition manager programmes will not be part of the strategic partnership.

– The partner will ultimately have investment discretion

The RFI says the institution “does not intend to create a standard ‘fund of fund’ relationship or consider this to be an outsourcing of responsibility”, but wants to create a “collaborative partnership”. The manager will have investment discretion, but work with CalPERS staff to develop an annual allocation plan that the pension will approve.

– The fee structure is not clear

The questionnaire asks respondents to provide “key economic terms including the compensation structure that is best aligned with CalPERS, acknowledges the scale of the mandate, achieves economies of scale over time, and is differentiated from the traditional management fee and carried interest model”.

According to Naked Capitalism, a blog that has been highly critical of the process, CalPERS’ outsourced real estate manager, GI Partners, receives a minimum of $10 million annually plus potential success fees on a portfolio of around $5 billion. CalPERS has not confirmed whether the private equity fee arrangement would look similar.

– It’s not a given that CalPERS will move forward with this

According to the document, after the filing deadline, CalPERS will start a due diligence process lasting a minimum of 45 days, and may ask some respondents to present to the investment committee. Interviews are expected to take place on 19 March or 16 April 2018. And after all that…

“There is a possibility that no new mandate is awarded at the end of this process.”