* Commitment to new managers questioned
* CalPERS CIO points to poor performance
* Reaffirms desire to back the best
By Gregory Roth
NEW YORK, Oct. 4 (Reuters-BUYOUTS) - The largest U.S. public
pension fund says it remains squarely in the corner of new and
emerging money managers.
Trying to counter claims aired at a recent state Senate
hearing, Joe Dear, chief investment officer of the California
Public Employees' Retirement System, wrote a letter to the
hearing chairman saying he was "troubled by testimony that
questioned our commitment and intentions" with regard to
emerging managers - investment firms that are often managed by
women and minorities.
Those testifying at the hearing not only accused the $244
billion pension fund of backing off its commitment to emerging
managers but also claimed that CalPERS was steering too much
money to established firms, including managers of "mega-buyout"
funds, an accusation that Dear disputed.
Dear walked a delicate line in his letter to Sen. Curren
Price Jr. Even as he emphasized that CalPERS retained an
"unwavering continued commitment to emerging and diverse
investment manager strategies," he bemoaned the performance of
CalPERS's emerging managers generally.
"CalPERS's emerging managers have underperformed their
respective asset classes in almost all circumstances," Dear
In data that accompanied the letter, the underperformance of
CalPERS's emerging managers was striking. In private equity, for
example, returns of emerging managers fell well below the
returns for the asset class as a whole. For the last three
years, emerging manager returns in private equity were 12.3
percent, compared with 20.0 percent for private equity
overall. For the last five years, emerging manager returns were
3.9 percent, compared with 7.2 percent for the private equity
program overall. And since inception, private equity emerging
managers returned an average of 7.0 percent, compared with 11.0
"At the end of the day, what matters most is the risk
adjusted return," Dear wrote.
In part, Dear's letter to Price helped rebut hearing
testimony claiming that emerging managers generally
over-performed, not underperformed. Price, in an email to
Buyouts Magazine, published by Thomson Reuters, wrote that data
from the National Association of Investment Companies paints
"quite a different picture" than that presented in the testimony
and shows that "some of these emerging managers are performing
well." CalPERS's goal should be "to find and use these firms,"
The question of CalPERS's commitment to emerging managers
first arose after some recent high-profile changes to its
programs. Earlier this year, Credit Suisse won a bid from
CalPERS to manage a $100 million private equity fund of funds
called Capital Link Fund III. Because the two predecessor funds
had each been a far larger $500 million, some saw evidence that
CalPERS's commitment to emerging managers was wavering.
More fodder for critics came from the phase-out, announced
in August, of the $1 billion California Initiative program, a
private investment fund earmarked to invest in companies located
in the state's economically disadvantaged areas. According to a
CalPERS report, the program, which was launched in 2001, "has
not met CalPERS investment return expectations."
CalPERS has said repeatedly that one of its overarching
goals has been to reduce the overall number of investment
relationships. At present, it has more than 300 external
relationships with emerging managers. Said Brad Pacheco, a
CalPERS spokesman: "We've had to do some portfolio
restructuring, and that has led to the ending of some
Despite recent changes to some programs, the system still
heralds its $1 billion in commitments to emerging market
managers (almost all within its private equity portfolio) since
2009. That amounts to 18 percent of the system's $5.2 billion in
private equity commitments since 2009, which is identical to the
18 percent share of emerging manager commitments that CalPERS
made before the financial crisis. For all asset classes, CalPERS
has invested $9.7 billion with emerging managers, about 11
percent of its externally managed capital, according to the
In related news, CalPERS recently announced a series of
workshops for prospective emerging market managers aimed at
explaining how the system evaluated such managers and their
investment pitches. "We have heard loud and clear from the
emerging manager community that we can do a better job with our
external outreach," Dear said in a press release.