LP Radar: CalPERS’ emerging thought

The California Public Employees’ Retirement System has long been a leader in the investment world, setting trends that other large institutions tend to follow.

Arguably, in recent years, the system’s influence on the private equity industry has waned as CalPERS has slowed its commitment pace and become very strict about what kinds of terms it will accept from managers, even those with the best performance.

However, one area within private equity where CalPERS continues to exert enormous influence is around emerging


manager strategies – managers on their first or second funds, who are often female or from ethnic minorities.

To be sure, this segment of the industry – an incubator for the next generation of top firms – is small. But it’s also significant. By fostering diversity within private equity, it helps the industry to better reflect the changing face of the US. For example, Hispanics are predicted to make up the majority of the population by 2043, according to the US Census.

The problem with most private equity emerging manager programmes at public pension systems in the US (and more are adding them every year) is performance. In other words: can these programmes really deliver the kind of returns these systems need to meet the obligations to their pensioners? And there’s still a widespread perception that investment strategies with a more socially responsible focus just do not provide the kind of performance demonstrated in past years by private equity more generally.

That perception continues to be challenged. Last year, the National Association of Investment Companies, which represents mostly diverse private equity firms in the US, published a study (with data compiled by KPMG) showing that its own members produced a median net internal rate of return from 1998 to 2011 of 15.2 percent – compared to just 3.7 percent for all US private equity and 7.1 percent for US buyout funds.

We don't know yet if the positive performance of diverse managers is wiped out by the extra layer of fees or not, and it will take time for us to figure that out.

Laurie Weir