Hopes fade for CalPERS to make big return to venture

The US's largest public pension has been considering various strategies to get back into VC. But the strategy unveiled last week is not likely to have a venture capital component.

The California Public Employees’ Retirement System said last year that it wanted to get back into venture capital, but the nation’s largest public pension fund has made little if any progress so far.

CalPERS sparked hope in the VC industry in the spring of 2019 when it put forth a plan to create a new fund that would make billions of dollars in late-stage and growth investments. Chief investment officer Yu (Ben) Meng kept hope alive in November when he told board members: “We are trying to find ways to … get venture capital investment back in our portfolio.”

Seven months later, CalPERS has gone silent about venture capital. It wasn’t part of the discussion last week when Meng announced a plan to leverage as much as 20 percent of the $385 billion fund and use that capital to grow its presence in private equity and private credit.

Meng told Bloomberg that the latest strategy “involves raising the fund’s current 8 percent target allocation to private equity ‘by a few percentage points’ and building a small position in private credit over the next three years.” He made no mention of venture capital.

“The most recent reports [show that CalPERS is] focused on buyouts and opportunistic strategies with some focus on niche debt,” Kelly DePonte, managing director of placement agent Probitas Partners, said in an email. “The corollary to this plan is a push to lever these assets to generate returns. It is much more difficult to leverage VC in an intelligent manner.”

The plan Meng announced last week is very different from CalPERS’ previous proposal to increase private equity exposure, including venture capital. In March 2019, the investment committee voted to pursue a new model that would create two investment vehicles with CalPERS as a sole GP, reported Buyouts, an affiliate publication of Venture Capital Journal. The plan received board approval, but not without criticism from some board members.

At that time, the pension system planned to commit $10 billion to each new investment fund, dubbed Pillar III and Pillar IV. The first fund, which the system called Innovation or Pillar III, would make late-stage and growth investments in tech, life sciences and healthcare. To date, neither of the funds has been created.

A CalPERS spokesperson declined to say if the plans for Pillar III and Pillar IV are now off the table.

CalPERS pulled back from venture eight years ago, saying it was disappointed with VC returns and couldn’t get into the best funds. In an interview with Buyouts in August 2012, the pension’s then-CIO said: “We expect venture capital to move from about 7 percent of our private equity portfolio to 1 percent. That essentially means that we’ll do venture capital on a strictly opportunistic basis.”

In November 2019, CalPERS reported that its venture holdings were valued at $550 million, or about 2 percent of its overall $26.5 billion PE portfolio. The pension has not released an update on venture capital holdings since then.

For now, CalPERS appears to be interested only in committing to venture funds in which it can put large dollar amounts to work. It recently committed $400 million to Insight Partners XI, a $9.5 billion growth fund that closed in April, according to the pension’s latest quarterly meeting documents. CalPERS previously invested $300 million in Insight’s $6.3 billion tenth fund in 2017.