The California Public Employees’ Retirement System is making a $1 billion wager that small private equity firms without the heft of the biggest buyout institutions can boost the pension giant’s returns and clout.
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Calpers, the largest public pension fund in the US, will invest $500 million each with TPG Inc. and GCM Grosvenor to help launch funds backing up-and-coming private equity firms, pension officials said. Those funds could take stakes in smaller investment managers and direct money to those run by women and minorities, as well as offer seed funding to newer firms.
Calpers Chief Investment Officer Nicole Musicco says Calpers’s latest investments aren’t related to affirmative action or politics. Instead, she hopes that by forging ties with private equity managers while they’re young, Calpers will become one of the first calls made when choice deals arise.
“It’s not about a diversity play,” she said in an interview. “It’s about generating alpha in a more thoughtful way, and leveraging partners we will work hand in glove with.”
Musicco, 48, has made a push for the $449 billion pension fund to invest directly in companies and bypass private equity giants. After joining Calpers in February 2022, Musicco began mapping out a strategy that will gradually curb its reliance on the biggest private equity funds and reduce fees over time.
Calpers is the first major investor in TPG’s new Next fund and Grosvenor’s new Elevate strategy. The fund could do more strategic partnerships with managers in other investment areas, she said, and it will help “to have a smart friend at the table.”
Major challenge
Musicco, who spent more than 16 years at the Ontario Teachers’ Pension Plan, faces the challenge of restoring Calpers’s credibility and influence after it cycled through a series of leaders, strategy shifts, and a retreat from private equity in the decade following the financial crisis. At the same time, she has to navigate demands from politicians and other local organizations on how state money should be managed.
California politicians passed a law in 2021 requiring the biggest public pensions to report more details on their investments with “emerging or diverse managers.”
Like other pension funds, Calpers has faced a shortfall — the firm’s funded status fell from 81.2% in June 2021 to an estimated 72% a year later. Calpers posted a 6.1% loss in the latest fiscal year, marking its worst investment performance in more than a decade. Meanwhile, the pension fund’s private equity investments had positive returns of 21.3%.
Read the full article here by Dawn Lim, Advisor Perspectives.
