Side Letter: CalPERS’ PE vindication; Nigel Dawn’s GP-led must-haves

CalPERS' decision to push deeper into the private markets looks to be vindicated following its underwhelming performance elsewhere in the portfolio. Plus: Evercore's Nigel Dawn shares his top tips for a successful continuation fund. Here's today's brief, for our valued subscribers only.

Just happened

CalPERS’ vindication
At first glance, the California Public Employees’ Retirement System’s latest annual results make for grim reading. The $440 billion institution on Wednesday posted a negative 6.1 percent preliminary net return on investments for the year to 30 June, its first loss since 2009. The decline was attributed to volatile global financial markets, geopolitical instability, domestic interest rate hikes and inflation – all of which have battered public market returns. Its global public equities returned negative 13.1 percent for the period, while fixed-income investments returned negative 14.5 percent.

There was, however, a silver lining to be found in the private markets portfolio. Private equity returned 21.3 percent – more than double its 8.3 percent benchmark – and real assets returned 24.1 percent, narrowly missing its 27.1 percent benchmark.

“This is a unique moment in the financial markets, and we’ve seen a deviation from some investing fundamentals,” CIO Nicole Musicco said in a statement. The pension, which still outperformed its total fund benchmark by 90 basis points, is increasing exposure to private markets assets, Musicco added.

It is of course worth noting that private market valuations lag their public counterparts, and performance may not be quite so strong in the months ahead. Still, their role in buttressing an otherwise even poorer return vindicates CalPERS’ decision in November to overhaul its asset allocation mix. Its PE policy target was hiked to 13 percent from 8 percent; real assets to 15 percent from 13 percent; and 5 percent was earmarked for the pension’s entry into private debt.

At a time when many of its peers are struggling to keep their PE allocations in check due to the denominator effect, the US’s largest public pension should have room to manoeuvre after offloading a multi-billion portfolio of PE stakes at a 10 percent discount earlier this year, as our colleagues at Secondaries Investor opine on here (registration required). It has been vocal about its plan to focus heavily on “cost-advantaged” opportunities such as co-investments; that appetite and leeway when others are capacity-constrained should help to make it a first port of call for GPs hoping to snap up cheaply priced assets on a tight deadline.

Continuation fund top tips
Thinking of running a continuation fund on your assets? Evercore’s Nigel Dawn can tell you a thing or two about how to ensure these processes are successful. Side Letter recently caught up with the investment bank’s private capital advisory head (Evercore was market leader last year advising on almost $60 billion of deals, two-thirds of which were so-called sponsor-initiated transactions like continuation funds). Here are his top three tips when considering such a deal, in order of priority:

  • No.3 Ensure that the portfolio company management team is aligned, to ensure alignment and buy-in.
  • No.2 GP alignment, in that the sponsor should reinvest a substantial amount of gains back into the continuation fund.
  • No.1 Run a truly competitive auction for price and terms discovery.

PEI will be publishing a Deep Dive into alignment in secondaries deals in our September issue. Stay tuned.


Private debt providers have made no secret of their readiness to finance deals at a time when traditional lenders have pulled back. “You have to be cautious, but I’d say we are a net beneficiary of the volatility,” Taj Sidhu, managing director at Carlyle and head of European illiquid credit, told our colleagues at Private Debt Investor this year (registration required). “We think borrowers who looked to the public markets are now coming to us because the public markets are getting much less reliable.”

Can private debt firms maintain this positive momentum? According to Bloomberg, credit giants such as BlackstoneApolloAresKKR and Goldman’s Antares Capital are reducing the amount of debt they’re providing in each deal amid a rising risk of recession. They’re also said to be seeking higher yields on financing packages with less leverage and stronger investor protections in the event of default. PE sponsors will no doubt find it trickier to capitalise on some of the bargains found in this environment if leveraged buyouts become more expensive and debt less readily available.

Leading the conversation

The Institutional Limited Partners Association will lead discussions for a group aimed at coming up with ESG measures that private fund advisers and their institutional investors can use, our colleagues at Regulatory Compliance Watch report (registration required). Officially, ILPA has become secretariat to the ESG Data Convergence Initiative. Since September, the project has garnered 195 members and developed six ESG categories with 15 core metrics. The idea is to give pension funds, trusts and other large investment groups a way to compare and contrast private funds’ ethical, social or governance offerings.

As secretariat, ILPA won’t lead discussions so much as it will chair them, director Matt Schey tells RCW. Under Gary Gensler’s SEC chairmanship, though, ILPA is a core constituency: he made one of his first speeches as chairman at ILPA, and his sweeping private fund reform proposals come with the express goal of protecting the people behind America’s pension funds.

“The initiative is not trying to answer for every industry question, but it does provide some core KPIs that I think most investors are interested in,” Schey notes. “There are so many groups out there, so many solutions, it can be difficult to know where to turn. The data convergence initiative fundamentally hinges on cooperation between LPs and GPs.”

Today’s letter was prepared by Alex Lynn with Adam Le and Bill Myers.