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Institutional Investor Profile: CalPERS
30/05/2007. Source: AltAssets. 
The California Public Employees' Retirement System is one of the major investors in private equity funds globally. Currently six per cent of the total fund, or about $15bn is invested in private equity, mostly in fund investments. AltAssets spoke with Clark McKinley, information officer,
CalPERS, about the organisation's private equity investment strategy. The CalPERS Alternative Investment Management (AIM) Program made its first private equity fund investment in 1990. Today the Program has over $35bn in active commitments to the asset class. The three investment components of the Program are the partnership component, which comprises all private equity fund investments; the direct component, which comprises all direct investments as well as co-investments; and the fund of funds component, which comprises CalPERS's investments in funds of funds, typically managed by teams focusing on those niche markets that CalPERS would not otherwise be able to access easily.
What type of investments do you look for?
'CalPERS is a long-term investor with a portfolio well diversified across geographies, industry sectors and private equity investment stages. Our fund investments are often structured as ten-year legal agreements.
To date CalPERS has invested in funds managed by firms including Advent International, Alta Partners, Apax Partners, Apollo Management, Behrman Capital, The Blackstone Group, Bridgepoint, Candover, The Carlyle Group, CVC Capital Partners, Doughty Hanson & Co, Ethos Private Equity, Fenway Partners, Francisco Partners, Granite Global Ventures, Hellman & Friedman, Ironbridge Capital, JPMorgan Partners, Kohlberg Kravis Roberts & Co., Landmark Partners, Levine Leichtman Capital Partners, Lexington Partners, Littlejohn & Co., Madison Dearborn Partners, Oak Hill Capital Partners, Permira, Silver Lake Partners, TowerBrook Capital Partners, Texas Pacific Group, Warburg Pincus, Welsh, Carson, and Anderson & Stowe.
We also have various specialised investment programmes, for example the California Initiative Program, for which we seek investments that help create jobs and aid the economies of the state's underserved urban and rural markets, and the Environmental Program, which comprises a portfolio of clean technology-focused investments.'
How do you conduct your due diligence?
'We have a detailed and disciplined procedure for selecting general partners. Investment opportunities are either brought to us or are actively sourced by our investment staff. The due diligence process focuses on a fund's fit within our portfolio. We do a lot of due diligence in-house and we also use external advisors and investment staff to assist us.
Our rigorous manager selection process includes an evaluation of many factors including: a fund's investment strategy; a team's track record and experience of executing the proposed strategy; a fund manager's culture, values and reputation; the alignment of interests between the GP and the LPs; and the attractiveness of the terms and conditions.
An important part of our due diligence process is the monitoring of our current investments. That helps us decide whether we want to be in a firm's new fund, and it also helps us benchmark other potential investments. We tend to stay with funds for five to ten years. Because of the J-curve, negative returns may be typical in the early years. Performance is the bottom line for us staying with partners.'
What do you look for in a good private equity manager?
'We look for firms that have operational expertise and whose interests align well with ours. They should have cohesive, stable and ethnical teams, people who are capable of executing the stated fund strategy. The strategy needs to fit into the current market environment. Past performance is another very important factors for us.'
What size of investments do you make?
'It is dependent on several factors, for example the size of the fund, its location, and on whether it is a new or an existing fund relationship. For new vehicles, the range typically is $300-500m. For re-ups it can be a lot more.'
How many investments do you intend to make over the next year?
'We invest on an opportunistic basis and we have no quotas.'
What is your appetite for first-time funds?
'We are interested in such opportunities. Last October, for example, we committed $400m to a new private equity fund of funds for emerging managers, called Centinela Capital Partners. The rationale behind it is to cultivate promising players on the small end of the market who may some day become significant market forces.'
Would you consider acquiring an LP stake in a fund from a fellow LP?
'Yes, we have an interest in secondary transactions, if the opportunity is right.'
What are your plans regarding portfolio construction/modification?
'We are currently realigning our AIM Program by sector and geography. In the future we will have staff working more intensively with our major partners. We will increasingly focus on launching investment vehicles with partners specialising in the small end of the market (relatively young, comparatively under-capitalised firms). The legacy portfolio, containing all other funds, is to be managed by a third party (entailing potential secondary market sales).'
What are the most interesting countries/sectors going forward?
'Asia and the other emerging markets will become increasingly attractive. In terms of industry sectors, cleantech is probably the sector that we regard as the most interesting new one going forward. It is our mandate to have a special focus on California, and we are ramping up a new healthcare initiative.'
What is the biggest challenge in the current private equity market?
'Finding worthy opportunities for available capital.'
How do you think the market will change in the future?
'Asia presents a major opportunity, and so do co-investment projects in infrastructure and alternative energy plants, with commodities purchasing components (for example, investing in ethanol plants in Brazil).'
How would you describe the market environment in which you are operating? Is the legal environment favourable/not favourable?
'We are very pleased with our overall performance, so the legal environment has not been a serious impediment.'
What advice would you give to a new private equity investor?
'Start small and think big. Do not be in a hurry. Look for funds with competent teams that have performance records and experience, however small the arena. Seek a high alignment of interest between your objectives and theirs.'
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