Friday Letter: CalPERS needs VC more than VC needs CalPERS

This week’s big news that CalPERS hired a new CIO with a pedigree in private markets has venture capitalists asking if the US’s largest public pension will start to invest in venture again.

Nicole Musicco, most recently a partner with RedBird Capital Partners, previously worked for 16 years at Ontario Teachers’ Pension Plan, leading private and public equity investment teams. She then spent another year as head of private markets for Investment Management Corporation of Ontario.

Musicco’s background has industry watchers speculating that she will direct CalPERS to go big on private markets. It has already signaled that it is going that way: last year it increased its PE allocation target from 8 percent to 13 percent of total assets.

What about VC? With nearly $500 billion in assets, CalPERS could single-handedly capitalize hundreds of venture funds. However, it largely started avoiding VC in the early 2010s, with its CIO at the time complaining of poor returns and lack of access to the best funds.

The pension system left a big hole in the market, but the world moved on and other LPs stepped in to fill the void. In fact, so many LPs poured money into VC that it is fair to ask if it really matters if CalPERS continues to sit on the sidelines.

Venture capital funds worldwide raised a record $131.3 billion in 2021, a 46 percent jump from the $89.9 billion they collected the previous year, according to exclusive research by Venture Capital Journal. The number of funds raised last year (649) was the second largest to date and was 24 percent greater than the 522 funds that closed in 2020.

LPs that stuck with VC through the down times have been handsomely rewarded. Venture funds have outperformed private equity and five other strategies based on one-year, three-year, five-year and 10-year IRRs, according to a Q2 2021 report by PitchBook.

Of course, those IRRs have more LPs clamoring to get into VC. In Probitas Partners’ latest annual survey of institutional investors, 54 percent of respondents identified VC as a compelling sector of interest, up from 30 percent of respondents in the 2021 survey.

The resurgence of VC was not lost on CalPERS’ prior CIO, Ben Meng, who said at a board meeting in November 2019: “We are trying to find ways to… get venture capital investment back in our portfolio. But [due to] the fact we have been out of venture for so long, there is some catching up we need to do.”

However, any talk of VC stopped after Meng abruptly departed in August 2020. Will that change now that Musicco is at the helm?

If CalPERs does decide to push into VC, it won’t have the clout it once had. “Many of the large, well-known VCs don’t want CalPERS as an LP because of their public disclosure requirements and because of their reputation for being difficult to deal with,” a veteran fund adviser told me. “They simply don’t need their money.”

As for small, early-stage funds, which make up the bulk of the market, those vehicles don’t make sense for CalPERS because it needs to put large amounts of capital to work, the adviser said.

Where does that leave Musicco? “This is a difficult issue to sort through, and Nicole will have to come up with original ideas to solve it,” the adviser said.

It is only February, but that quote is a leading contender for understatement of the year.