One of the two asset managers to which California Public Employees’ Retirement System allocated a combined $1 billion this week to expand diversity in alternative investment management said venture capital will be a key component of the inaugural fund it is launching with the pension fund’s capital.
“Our balance sheet partnerships that preceded the fund launch were venture capital relationships,” Pamela Pavkov, partner and head of TPG NEXT, told Venture Capital Journal. “Our pipeline has a very large percentage of venture capital managers in it, and some of the most exciting conversations we’re having are around newly formed venture firms. So that will be a really important strategy within TPG NEXT.”
CalPERS’ $500 million commitment is an anchor investment in TPG NEXT’s inaugural fund. The firm, based in San Francisco and Fort Worth, said it would continue to raise capital from other sources, but it declined to disclose the target size of the new fund.
Pavkov would not say what percentage of CalPERS’ capital that TPG NEXT will commit to venture funds or how many VC managers it will invest in this year. However, she noted that TPG NEXT is in active dialogue with hundreds of managers and she is “hopeful that we’ll be able to consummate a handful of those relationships this year.”
Pavkov declined to comment on specific investment criteria the fund will use to select VC managers but said, “Overall, the framework is pretty similar [to TPG’s existing strategies]. Of course, we’ll be applying specific thoughts around industries, stage, portfolio construction differently to VC than we might some larger funds.”
TPG NEXT will build on three partnerships it has already backed: Harlem Capital, a diversity-focused VC firm; VamosVentures, an early-stage venture firm that backs companies led by diverse teams, with a special focus on the Latinx community; and LandSpire Group, a Black-owned real estate firm.
In late 2019, TPG invested in Harlem Capital’s first fund, which closed on more than $40 million, and last year it invested in LandSpire’s flagship fund, which focuses on investment and development in secondary markets across the US. TPG has a strategic minority stake in VamosVentures.
TPG NEXT will focus primarily on North American fund managers. In addition to making traditional LP commitments to venture and other types of funds, it also plans to make GP commitments into management companies, co-invest alongside managers and make secondary purchases of diverse-led companies or funds.
TPG NEXT is the latest addition to TPG’s $16 billion impact investment platform, joining strategies The Rise Fund and TPG Rise Climate, which support entrepreneurs in 30 countries. Portfolio companies for those funds are working on expanding access to higher education, healthcare, banking and agriculture, as well as renewable energy infrastructure and other technologies aimed at reducing carbon footprints in transportation and other industries.
TPG NEXT launched in March 2021 with the aim of providing growth capital and operating resources to seed, support and scale a more diverse group of investors and entrepreneurs, including women, people of color and members of the LGBTQ+ community.
“We believe TPG NEXT is an expression of what we can do to not only push ourselves within the firm, but also in the PE industry,” TPG chief human resources officer Anilu Vazquez-Ubarri said in an April 2021 interview. “This is a natural extension of what we saw was a very clear issue – that diverse-led businesses struggle to raise capital. That’s true independent of the industry.
“The most important thing is we are mentoring the next generation of managers, who will eventually go and form funds that will be multi-generational. And that will really change the industry.”
Pavkov, who was hired last October to lead TPG NEXT, said, “The decision was made to transition TPG NEXT into a third-party fund offering” following the success of the investments it has made opportunistically in new fund managers and how well aligned they were with the firm’s overall direction.
Although TPG NEXT is less than two years old, TPG’s commitment to greater diversity in alternative asset management dates back several years. In 2017, it started to help recruit more women to the boards of its portfolio companies, which have since added nearly 200 women directors. In late 2019, TPG expanded its board focus to include race, ethnicity and sexual orientation, and it has compiled a database of more than 1,500 candidates from diverse backgrounds with broad sector and functional expertise.
The firm has also partnered with the National Association of Investment Companies to address the alternative investment industry’s pipeline challenges through organized events, training and other means of engagement. NAIC is the largest network of diverse-owned alternative asset managers, whose membership of more than 115 firms has a combined AUM exceeding $200 billion.
CalPERS’ commitment to TPG follows its board’s decision to boost the allocation to private equity from 8 percent to 13 percent starting with the 2022-23 fiscal year. In a statement, CalPERS chief investment officer Nicole Musicco said the pension firm intends to help “seed the next generation of diverse talent and foster different ways of seeing and solving problems” with its allocations to TPG and Chicago-based GCM Grosvenor. GCM told VCJ it will not be investing in venture managers.
Correction: Two figures were updated in the third to last paragraph of this story: the length of time of TPG’s diversity efforts and the number of women who are directors on boards of portfolio companies.