CalPERS is supersizing its VC position

The nation's largest pension fund wants to grow VC from about 1.4 percent to 10 percent of its private equity portfolio.

California Public Employees’ Retirement System plans to dramatically increase its investment in venture capital funds, growing the VC portion of its $55 billion private equity portfolio to about 10 percent from a current 1.4 percent.

The plan, which is expected to be complete in about five years, was outlined by Anton Orlich, head of the $452.6 billion system’s private equity program, at its June 20 investment committee meeting.

Photo of Rising Stars 2023 Ben Lee of CalPERS
Ben Lee, CalPERS

The move appears to be formalizing a strategy that CalPERS embarked on about two and a half years ago, when it hired Ben Lee as head of venture capital in November 2020. As Venture Capital Journal previously reported, Lee said he was tasked with investing about $1 billion a year in VC over the ensuing five years.

In 2022, CalPERS committed more than $1.1 billion to 15 venture vehicles, according to VCJ research published in March. Lightspeed Venture Partners was the biggest beneficiary, securing $400 million for three different funds, followed by Sequoia Capital ($282 million for four funds) and Bessemer Venture Partners ($150 million for two funds). Other VC managers that received commitments from CalPERS in 2022 were Goodwater Capital ($100 million for two funds), Bond Capital ($75 million for one fund) and Base10 Partners ($50 million for a single fund). CalPERS also committed a combined $120 million to funds managed by VC firms whose names were undisclosed.

The 2020 push into venture was a major shift for CalPERS. Eight years earlier it moved to cut its exposure to venture capital from about 7 percent of its PE portfolio to about 1 percent, citing the poor performance of past investments and inability to access the best managers.

CalPERS has changed its tune about the tech-focused asset class after watching other LPs generate strong returns during the bull market from 2010-2020.

In his presentation to the investment committee, Orlich cited State Street data that showed venture capital outperformed buyout funds every year from 2010-2019. VC fund performance has been driven by the returns of highest-quartile funds, making access to top-performing VCs a challenging prospect, Orlich said.

“Since these firms are known, maintain performance and are disciplined, they tend to be oversubscribed,” he said. “It’s as much of an exercise in access as it is manager selection.”

A memo from investment consultant Meketa noted that CalPERS’ venture investments have not fared as well as the rest of its PE portfolio, with a one-year performance of negative 24.8 percent.

The system’s venture capital portfolio has returned 8.6 percent over the past decade, below the private equity portfolio’s overall return of 12.1 percent, according to Meketa.

More co-investing

In addition to bolstering its VC program, CalPERS is boosting its co-investments. Orlich noted that the pension made $4 billion in co-investment commitments – or half of its total PE commitments – in the second half of 2022, the highest amount in the system’s history.

Fee reduction is the primary attraction for the system’s interest in co-investments, Orlich told committee members.

“It’s one of the most effective ways to address costs. A lot of cost mitigation efforts come at the expense of net returns. But increasing our commitments to co-investments is where reducing costs goes hand-in-hand with improving net returns,” Orlich said.

Over the past decade, the system’s co-investments have returned 12.1 percent, in line with the results of its overall private equity portfolio, according to a note from adviser Meketa.