CalPERS’ stakes under microscope

The California Public Employees’ Retirement System sold $2.1 billion of private equity assets in late 2007 on the secondary market, according to recently released private equity performance data. The data cover fund data through the second quarter of 2008.

It is unclear how many funds CalPERS unloaded on the secondary market. Some 96 funds listed in the state pension fund’s prior report are missing from the most recent performance data, according to VCJ research. The missing funds include seven funds raised in 2005 and 10 funds raised in 2004.

A CalPERS spokesman confirmed that most of the missing funds were sold in secondary sales. CalPERS said there were 80 partnerships in this portfolio and 60 different general partnership relationships, diversified across venture capital, buyouts and other private equity classes.

London-based private equity research firm Preqin, which has analyzed historical sales of the LP’s private equity assets, said that the majority of fund interests sold reside in the third and bottom quartiles of Preqin’s private equity benchmarks. However, some of the funds that were sold included some top-performing funds. Preqin said the sales mainly included venture and other private equity funds of vintages 2000 and 2001.

CalPERS didn’t confirm Preqin’s calculations.

Among the best performing venture funds that CalPERS apparently sold was Media Communications Partners II, a $166 million fund that M/C Venture Partners raised in 1992. The fund had a net IRR of 38.8%, Preqin said. CalPERS, which committed $25 million to the fund, reported on June 30 that its cash-in value was $25 million and its cash-out was $110 million.

Preqin said the worst performing fund interest sold was in American River Ventures I, a 2001 vintage fund with net IRR of negative 27.7 percent. Roseville, Calif.-based American River Ventures raised $100 million for the fund, which closed in 2001. CalPERS committed $15 million to the fund. Its cash-in value was $12 million and its cash-out was about $19,000, as of June 30.

Good timing

The state pension fund said it couldn’t specify how much more it gained from the sale in 2007, when the market was peaking. The initial sale of the $2.1 billion assets was in the third quarter of 2007, when the Dow Jones Industrial Average ranged from 13,000 to 14,000 points.

Leon Shahinian, senior investment officer at CalPERS private equity program, said via an email from CalPERS spokesman: “In today’s market, we would have had hundreds of millions in losses.”

The state pension fund said that its strategy of unloading the funds on the secondary market dated back to late 2005, when its Alternative Investment Management (AIM) program presented a strategic plan to the CalPERS board to lessen the administrative burden of having so many funds to manage, and to optimize long-term private equity performance.

The secondary market for private equity has heated up recently as public equity markets have declined.

In November, Washington Mutual Inc., the holding company that owned Washington Mutual Savings Bank prior to the FDIC seizure in September, filed documents in bankruptcy court outlining its plans to sell its interests in 10 venture capital funds. Arch Venture Partners, FT Ventures, Madrona Venture Group and Maveron are among the funds supported by WaMu, according to a bankruptcy court filing.

Meanwhile, an estimated $130 billion worth of private equity commitments from banks, pension funds and endowments are being put on the market, looking for a secondary buyer, according to an analysis by San Francisco-based funds of funds advisor Paul Capital. —Megan Davies and VCJ staff

A version of this story previously appeared in Reuters DealZone blog.