CalPERS stands for California Public Employees’ Retirement System. It is one of the powerhouses of investing in America, placing tens and hundreds of millions of dollars at a throw in only the largest and best known private equity firms (including venture, buyout and other funds). It helps provide the fuel that powers the private equity rocket, and any fund in the past that got CalPERS money knew it had arrived. In a most recent report, we see only three locally based firms in the select CalPERS list—Carlyle, JMI and NEA. Recent press reports suggest that it may not be a pure merit system that gets a fund on the CalPERS list, but we will save that for another commentary.
Beginning in the early part of this decade, venture and other private equity funds were in an uproar over individual state movements to force state-sponsored pension funds like CalPERS to reveal the fees paid to private equity firms as well as the returns received on investments in those funds. Certain citizen groups thought that there was too much undisclosed hanky-panky going on. Private equity, understandably, liked being private. There were many high-minded arguments advanced by private equity leading to threats that private equity would avoid public pension funds in the future, but that went the way of all hunger strikes. Private equity did not want the fees it receives revealed to the public and to competitors (that doesn’t help your bargaining leverage). Those fees pay for the year-to-year operating expenses of the funds, often keeping mediocre or poor performing funds in business. But the bigger concern was in revealing actual portfolio returns. Private equity funds are nothing like mutual funds. How individual funds are “marked to market” and who marks them to market can mean the difference between night and day. And what if your home run investment occurs late in the cycle of your fund? For years, your fund can look like a dog, obfuscating your eventual exceptional returns. That kind of disclosure can thwart your fundraising efforts for the next fund.
So, keeping all those perils in mind, it was still interesting to see the returns posted in a recent CalPERS list—again, the returns are calculated by CalPERS and not the sponsoring fund. Three Carlyle funds, vintage 2005 through 2007, were all negative, the worst being a European fund down 50% where CalPERS has already contributed $180M. It is still early in these funds, but if CalPERS really believes it is marking to market for what is ultimately achievable, this is a lot of lost value. JMI Equity has two funds represented for years 2005 and 2007, also early and midway in the investment cycle. The older fund is actually showing a 14% return while the new fund is down 15%. New Enterprise Associates (NEA) is one of the oldest firms in the U.S., so it is not surprising to see it have a long relationship with CalPERS and 9 extant funds represented. Three of the funds dating to the late 1990’s show tremendous returns. Three of the early 2000 funds are at least or barely positive. One old and one new fund are negative. One is too new to rate. Over the years, CalPERS appears to have handed $564M to NEA and gotten back from NEA $1.2B. I don’t think there is much to debate here. If more of CalPERS’ chosen firms were as solid as NEA, the managers at CalPERS would have a lot more cover for these alleged transgressions.
