CalPERS has second thoughts about ditching venture

In what could lead to a dramatic policy shift, the CIO of the California Public Employees’ Retirement System said he wants the nation’s largest pension fund to do more venture investing.

“We are trying to find ways to … get venture capital investment back in our portfolio,” Chief Investment Officer Yu (Ben) Meng said at CalPERS’ Nov. 18 board meeting. “But [due to] the fact we have been out of venture for so long, there is some catching up we need to do.”

CalPERS largely turned its back on venture back some seven years ago, citing poor returns and the inability to access the best funds. In an interview with VCJ sister publication Buyouts in August 2013, the pension’s then-CIO said: “We expect venture capital to move from about 7 percent of our private equity portfolio to 1 percent. That essentially means that we’ll do venture capital on a strictly opportunistic basis.”

Today, CalPERS’ venture holdings are valued at just $550 million, or about 2 percent of its overall $26.5 billion PE portfolio, according to report prepared by Managing Investment Director Greg Ruiz. Buyouts is the largest slice of the pie, valued at $18 billion, or 68 percent of the total.

Even though VC makes up a tiny portion of CalPERS’ PE program, it is the pension’s best-performing sub-asset class in the short-term, said consultant Meketa Investment Group. For the fiscal year ended June 30, venture returned 16.9 percent. But venture’s longer-term returns were lackluster, coming in at 3.8 percent over three years, 3.2 percent over five years and 6.7 percent over 10 years, Meketa said.

In contrast, CalPERS’ overall PE program produced a 7.7 percent return for fiscal 2019, 12.5 percent over three years, 9.6 percent over five years and 14 percent over 10 years.

Buyouts performed particularly well over time. Its one-year returns were just 8.2 percent, but its long-term returns shot past venture: 14.2 percent over three years, 11 percent over five years and 14.3 percent over 10 years, Meketa reported.

Growth plans

While it mulls what to do with venture, CalPERS is also thinking about boosting the pace of its private equity commitments in coming years.

Staff committed $6.7 billion to 17 funds and one separate managed account in fiscal 2019, the most since 2008, according to Meketa. Despite the record amount, the overall PE program shrank to $26.5 billion as of June 30, down 3 percent from $27.2 billion a year before.

Meketa said the decline happened because managers “returned substantially more cash (largely from exited investments) than they called for new investments.”

That left private equity making up 7.1 percent of the $387.81 billion pension, against an 8 percent target. The system is considering several ways to grow the program. This could involve more co-investments, expanding its manager roster and continuing to develop the “four pillars” strategy, which includes developing two CalPERS-controlled investment funds.

Meketa suggested CalPERS staff may seek to find new managers to provide greater portfolio diversification. For the last several years, CalPERS limited its PE partners to a “Core 30” of trusted managers, a tactic whose effectiveness Meketa questioned in the past.

CalPERS declined to comment.

Action Item: Read Meketa’s full report here and Ruiz’s presentation here.

Additional reporting by Lawrence Aragon