CalPERS creates direct investment platforms for late-stage VC, long-term PE bets

California Public Employees’ Retirement System (CalPERS), the largest US pension fund that is also a limited partner (LP) for a few Indian PE firms, on Thursday announced that it will create a new entity, CalPERS Direct, to make direct private equity investments.

CalPERS joins a slew of global LPs that have active direct investments’ programmes across geographies, including India. Several LPs in India including UK’s CDC and Canadian pension funds, besides a clutch of sovereign funds, have direct investments in Indian companies as well as have a fund-of-funds exposure to local PE-VC fund managers.

CalPERS Direct will consist of two funds: Innovation and Horizon.

While Innovation will focus on late-stage investments in technology, life sciences, and healthcare, Horizon will make long-term investments in core economy companies that are established.

CalPERS Direct will be governed by a separate, independent board.

The pension fund is planning to launch CalPERS Direct in the first half next year after final review and approval by its board.

CalPERS Direct, when launched, will operate alongside CalPERS’ existing PE structure that typically invests in co-mingled PE funds.

Ted Eliopoulos, chief investment officer of CalPERS, said the investment team has spent months exploring options in order to design an approach to PE that takes advantage of CalPERS’ size and brand.

He is optimistic that the new approach will drive stronger PE returns and help achieve economies of scale over time.

“CalPERS Direct is a long-term investment strategy specifically designed to align with the long-term liabilities we have as a pension system,” said Henry Jones, chairman of investment committee at CalPERS.

The pension fund allocates 10% of its total portfolio to PE investments estimated to be up to $13 billion a year.
Its private equity holdings include direct investments and co-investments with existing CalPERS’ general partners, direct secondary investments, and fund of funds.

Sacramento-based CalPERS had launched the private equity programme in the early 1990s. It said the programme has been its highest returning class with a 10.6% annual return.

CalPERS’ total fund market value currently stands at approximately $349 billion.

India exposure
CalPERS, which elected India-origin Priya Mathur as board president in January, is an investor in several global private equity funds investing in India. These include Blackstone, KKR, Carlyle, and TPG.

In February 2018, VCCircle reported CalPERS has seen an increase in its India exposure after two years of decline as the fair value of its equity investments rose.

CalPERS is a key investor in several Indian private equity funds and the increase in its India exposure is in line with that of other North American retirement funds, such as Canada Pension Plan Investment Board (CPPIB) and Canadian pension fund CDPQ, that have ramped up their investments in the South Asian nation.

CalPERS’ total exposure to assets linked to the Indian rupee rose 1.6% to $1.45 billion in its financial year ended June 2017, it said in its annual report.

In comparison, its allocation had slipped 5% to $1.43 billion in 2015-16 from $1.51 billion the previous year and $1.7 billion in 2013-14.

In India, CalPERS has held significant equity holdings in large and mid-sized companies operating in sectors including banking, energy, consumer goods, pharmaceutical and engineering. It has backed Tech Mahindra, Unitech, HCL Technologies, Siemens, Tata Steel, and Polaris Consulting & Services.

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