From bubbles to bigger bets

A few months after CalPERS chief investment officer Mark Anson warned of a private equity “bubble”, the board of the California pension fund will soon decide whether to give him more autonomy in making private equity allocation decisions. By Paul Fruchbom

In February, Mark Anson, chief investment officer of the California Public Employees’ Retirement System (CalPERS), the largest pension fund in the US, sent ripples through the leveraged buyout community – speaking at a conference in Geneva, Anson warned that private equity was on the verge of a bubble.

“The current overhang of leveraged buyouts committed but not invested is $182 billion,” Anson told listeners at the International Fund Management 2005 conference. “A lot of money is chasing high yield. Hedge funds are competing with buyout managers and that convergence scares me.”

Unlike Alan Greenspan, Anson might not be able to move markets, but as the man responsible for managing $185 billion (€147 billion) in pension fund assets – and approximately $9 billion in alternative investment commitments – his words carry some weight.

Soon, they might carry even more.

The CalPERS board will vote today on whether to give Anson and senior investment officer Leon Shahinian more autonomy in making private equity commitments.


Anson

Under the terms of the proposal, Anson and Shahinian would be able to commit $800 million and $400 million, respectively, to top quartile private equity firms (as measured by Venture Economics) without approval from the pension funds’ 13-person board of administration. Currently, the two investment officers have authority for half those dollar amounts.

According to the proposal, the primary reason for delegating further oversight to the two officers is the increasing size of private equity funds and their relative success, a trend that CalPERS believes will continue:  “It is Staff’s view that the largest funds will enjoy a competitive advantage to source the best transactions and continue to attract/retain the brightest investment professionals,” the proposal notes.

The new authority was no doubt designed to give CalPERS an edge over other limited partners as competition to get into the largest fund increases. GPs may be less likely to scale back a commitment from CalPERS if they know the decision-making process is streamlined.

Notes a source close to the pension fund, “The primary reason [this was proposed] was just to allow CalPERs to be more nimble and to give the senior investment officer a degree of flexibility to commit to top tier funds as he sees fit.”

Another part of the proposal would give Anson and Shahinian further autonomy to fund second quartile firms, up to $200 million and $100 million, respectively. Although the document notes that less than 10 percent of CalPERS’ annual commitments are to second quartile funds, the rationale for the current proposal is to uncover firms where “there is a high expectation of future top quartile performance.”

It is Staff’s view that the largest funds will enjoy a competitive advantage to source the best transactions and continue to attract/retain the brightest investment professionals.

CalPERS staff proposal dated May 11, 2005

The final piece of the proposal would increase, from 5 percent to 10 percent, the percentage of dollars that can be invested with any one firm. Currently, four funds in CalPERS’ portfolio are near the 5 percent concentration mark – The Blackstone Group, CVC Capital, Texas Pacific Group and The Carlyle Group. With Blackstone looking to raise a fund in excess of $10 billion, the new limits would give the pension fund additional flexibility to write bigger checks to the private equity juggernaut, as well as to other large funds.

These proposed changes come six months after CalPERS announced another set of modifications in its private equity program, when it reduced its target commitment to the asset class by 1 percent (from 7 percent to 6 percent). At the time, CalPERS officials insisted the new asset mix did not represent a negative outlook for private equity, instead maintaining it would better reflect current holdings, reduce risks and save money on transaction costs.

Although the current proposal seem to contrast Anson’s public comments of a few months ago, in some respects, it supports the limited partner mantra that is often repeated, but not as often followed – “bigger commitments with fewer partners”.

As buyout funds continue to escalate in size – along with limited partners’ desire to invest in them – one wonders if others will follow CalPERS’ lead.