The California Public Employees Retirement System [CalPERS], the largest single institutional investor in private equity with nearly $20bn allocated to the asset class, continues to disclose further information on its investments and their current performance.
On Wednesday of this week the fund posted information on its 150 fund-strong venture capital portfolio, which is administered by gatekeeper Grove Street Advisors, on its web site.
Few industry professionals were surprised that the funds, which are all of recent vintage – ranging from between 1999 and 2002 as their inception year – are showing sizeable negative returns. “You are looking at funds that have been out investing and are yet to harvest,” commented one general partner of a US venture firm [that doesn’t count CalPERS as an investor].
This refers to the so-called “J curve effect” where a private equity or venture fund’s returns are negative in the early years [more capital leaves than returns to the fund] before turning positive later in the fund’s life – and hence creating a J-shaped line to a returns chart.
Others though will be pondering whether the size of the negative returns will make the likelihood of the returns ever showing a net gain increasingly remote. Said the same venture GP: “Whether the J-curve is going to end up more of a U for some of these funds [meaning the net value of the fund finally returns to its original amount but shows no gain] is open to debate. The key thing here is what’s left in their portfolios.”
Dow Jones quotes CalPERS spokesman Brad Pacheco as saying that the new disclosure follows from a board policy adopted on 17 March 2003 that requires the fund to release quarterly updates of fund performance. 'Some people may view we've pushed the envelope,' he said. The fund has had to respond to a long-running campaign by the local San Jose Mercury News newspaper that campaigned for the fund to make public the performance of its private equity and venture investments.
Notable venture funds in the portfolio showing sizeable negative internal rates of return [IRR] include Austin Ventures VIII, dating from 2001, with a – 41 per cent return at present and Battery Ventures VI, dating from 2000, showing – 32 per cent. Other funds in the CalPERS portfolio include familiar VC names such as Draper Fisher Jurvetson, Morgan Stanley Dean Witter Venture Partners and US Venture Partners.
In a statement, Grove Street said it understood CalPERS’ desire to offer 'greater public transparency.' The gate keeper, which includes former CalPERS investment head Barry Gonder in its team, also pointed out that most of the capital committed to the funds was to be invested in the next few years. “The early data indicates that they are on track to outperform the industry,' the statement read.
CalPERS, had initially released returns for more than 200 other funds in its $19.4bn venture portfolio in December. The fund manages a total of $131bn in public pension money across a range of mainstream as well as alternative asset classes.