CalPERS rains $1bn on emerging managers

The nation’s largest pension system’s emerging manager commitment flies in the face of many other public allocators that have emphasized re-ups with existing relationships.

California Public Employees’ Retirement System will commit $1 billion to two asset managers with new strategies focused on emerging managers.

CalPERS’ new strategy runs contrary to most other large retirement systems that have emphasized re-upping with existing, long-standing managers during a tumultuous economic environment.

But this approach could bode well for the nation’s largest pension system as data suggests emerging managers outperform more established peers — while obtaining ownership GP stakes in these funds could include friendlier economics.

CalPERS announced on January 10 that it has committed $500 million each to the new TPG NEXT fund and GCM Grosvenor’s Elevate strategy.

“Backing established and proven managers has proven good for de-risking a portfolio, particularly in the short-term. But sophisticated investors are always interested in planting new seeds and embracing new trends,” said Pamela Pavkov, partner and head of TPG NEXT.

While many large public allocators are enduring a rocky macroeconomic picture, overallocations due to the denominator effect and managing liquidity needs, now is a good time to invest, particularly with emerging managers, according to Jon Levin, president of GCM Grosvenor.

“From our standpoint, there is no better time to make capital available to back investor entrepreneurs who will benefit from our fund strategy,” Levin said.

Both TPG’s NEXT fund and GCM’s Elevate strategy will take investment stakes in funds they invest in, on top of providing capital, according to both firms. They also will provide co-investment opportunities to CalPERS.

One difference between the two is that TPG will help its GPs navigate the secondaries market if they need to restructure, while GCM will issue loans to funds under its watch.

‘Strong pipeline’

“A lot of newer managers are undercapitalized,” Pavkov said. “They have a strong pipeline of investment activity but have to go off to seek capital. TPG Next will alleviate the pain point for new managers by backstopping deal flow.”

TPG Next has more than 150 targets for investments, according to Pavkov. Levin said he expects Elevate to back between eight to 12 managers.

According to a 2021 report in the National Association of Investment Companies, an organization that represents diverse-owned alternative investment funds, diverse-funds have outperformed a broader index of private equity funds across a series of metrics from 2011 to 2022.

“With CalPERS being the largest pension plan in the US, with a history of being progressive and innovative, the allocations to TPG NEXT and GCM Grosvenor Elevate will obviously help the managers who receive the investments,” said Robert Greene, president and CEO of the NAIC. “However, the CalPERS commitment also serves as a beacon for other institutional investors to recognize the benefits of investing in this vibrant and high performing market.”

CalPERS’s funding could prove a boom to its returns while also providing financing to new managers who are struggling to fundraise in the current environment, according to sources.

“It makes sense to keep a dedicated allocation to first-time funds,” said Ed Stubbings, managing director of Ternion Alternatives, which assists with fundraising for new funds, about CalPERS’s initiative.

“There are many high-quality new firms out there who are speaking to LPs and are finding even in January of this year that allocations are tight for the year due to re-ups,” Stubbings added. “Without dedicated pools of capital focused on emerging and diverse managers there’s a risk that re-ups will eat first-time fund allocation.”

Renewed focus

Under the watch of new CIO Nicole Musicco, CalPERS is overhauling its private equity program after a “lost decade” under-investing in the asset class caused the system to miss out on between $11 billion and $18 billion in returns, Musicco said in September.

Part of the overhaul includes lifting limits for investment staff to make commitments without board approval and a focus on direct investing opportunities. The system also recently named Anton Orlich to head its private equity program, along with a newly created growth and innovation program.

The giant pension has also become an active investor in venture capital funds over the past couple of years after deliberately avoiding VC for about eight years. As Venture Capital Journal recently reported, CalPERS in November 2020 hired Ben Lee as head of venture capital and tasked him with investing about a billion dollars a year in VC for the next five years.

Across both its Venture Capital team and its Growth Equity team, CalPERS has made 18 commitments totaling $2.3 billion to 10 different VC and growth managers, based on VCJ’s review of two years’ worth of CalPERS’ quarterly investment updates. The 10 managers include Base 10 Partners, Bessemer Venture Partners, Lightspeed Venture Partners and Sequoia, among others.

Venture and growth now account for about 20 percent of CalPERS’ private equity portfolio, with a long-term goal of topping 30 percent of PE.

Additional reporting by Lawrence Aragon