Venture capital could become a much larger investment vehicle for the California Public Employees' Retirement System, as the fund’s staff is signaling plans to expand its venture capital investment by billions of dollars.
Under the suggestion, CalPERS' investment into venture capital would rise from its current 0.16% of its total portfolio to 1.3%, which in current dollars would mean increasing from about $758 million to around $7 billion.
That larger pool of money could also help CalPERS get into investments that it currently doesn’t have access to, said Anton Orlich, managing investment director of private equity for CalPERS, during a recent meeting.
He suggested CalPERS commit to putting roughly 10% of its private equity investments into venture capital, which is currently about 1.4% of the total private equity class.
If CalPERS had more money available for venture capital, the pension fund would become more attractive for funds to consider taking on as an investor during times when cash is tight.
As part of its VC-investing strategy, CalPERS will "partner with historically hard-to-access managers and become a preferred solution provider in a period when some limited partners are pulling back commitments," according to its staff report.
Orlich said the transition isn’t going to happen overnight or even over a few years.
“Fund managers who have outperformed in the past are more likely to perform in the future,” he said. “Because of their performance, they are highly oversubscribed. … It will take a long time to generate the relationships and allocations with these managers.”
CalPERS' target goal is for 13% of its portfolio to be in private equity, which includes buyouts, credit, growth and venture capital. Buyout dominates the asset allocation with 73% of private equity investment. The goal of increasing venture capital investments is to capture higher returns that have been seen in that sector over the years, Orlich said. As of July 11, CalPERS had $459 billion in assets under management.
The Sacramento-based pension system should also be more consistent in its investments into private equity in general and venture capital specifically, Orlich said.
Undercommitment to private equity over the past decade occurred during what turned out to be over-performing vintage years, he said.
“The point is not to say that CalPERS should have timed the market better. That is very difficult to do, and frankly it’s an unreliable way to generate returns,” Orlich said. “The goal is to be consistent so that those strong vintage years are not missed."
A consistent investment into private equity would also allow CalPERS to not have to try to divine the tea leaves of the economy.
"While staff monitors the economy, the main point here is to characterize our implementation as consistent. We are sensitive to the macroeconomic environment. We pay attention to its impact on the portfolio, but we would like to deploy consistently regardless of the macroeconomic environment,” Orlich said.
He added that it's ironic that the macroeconomic pressures often are in conjunction with better vintage years in private equity.
“It is hard to time those strong vintage years, so it is critical to be consistent in deployment,” he said.
CalPERS is currently implementing a comprehensive strategy toward increasing its investments in private equity.
