Fundraising: Relationship consolidation

In June 2015 the $303.6 billion California Public Employees’ Retirement System (CalPERS) decided to drastically scale back the number of external money managers it works with to minimise costs.

Intending to keep its allocation to alternatives broadly the same, the public pension giant is aiming to reduce its manager relationships from 212 to around 100, within which the number of private equity GPs it works with will be slashed from 98 to 30.

“Our benefit payments are now greater than the sum of our contributions and investment income, which makes it even more crucial and critical that we minimise costs going forward and have very strategic, meaningful relationships that scale with the managers we need access to,” chief investment officer Ted Eliopoulos said in a conference call at the time.

As something of a trailblazer in the industry, it can be expected that others will follow CalPERS’ lead. In the meantime, some institutional investors are gradually dialling back their manager relationships as they shift toward a greater focus on direct investing. The chance to get hold of a chunkier portion of LPs’ private equity allocation is certainly a bonus for those managers that make the cut and can handle large ticket sizes. But it presents a problem for mid-market funds and other small providers who are unable to cope with such big cheques.

It also creates an issue for the LPs themselves, who will find it harder to access funds at the smaller end of the market, many of which consistently outperform their large-cap counterparts.

However, the move could create opportunities for smaller LPs who may find less competition for access to their preferred managers.