CalSTRS exec gives a frank assessment of CPP Private Equity portfolio

Stupid as it has been for me to turn a critical eye onto the CPP Investment Board over the past seven years, there been some third party validation of late of much of the analysis and commentary that has me in the doghouse in certain quarters.

First, we had the Globe and Mail finally bearing down last month on some of the many topics and issues you’ve read about over the course of seven long years. Today’s validation comes via the Director of Private Equity at California State Teachers’ Retirement System as she weighs in, too; albeit indirectly. CalSTRS, with $189 billion under management, describes itself as “the largest educator-only pension fund in the world” and is very much a peer of Canada’s CPP in terms of size and asset allocation strategy.

CalSTRS has US$21 billion of private equity exposure; a smaller allocation than CPPIB’s $41 billion, but still chunky enough to give CalSTRS every reason to be transparent with its stakeholders about how that investment is doing, and where it is headed over the coming years.

Courtesy of a forthright interview with Buyouts Magazine, we can glean a frank assessment of how CPP’s (ie. our) mega buyout portfolio is doing too, since we share many of the same “2005-2008” private equity fund commitments that CalSTRS invested in.

I know it’s not from our own fund managers, but here’s the news nonetheless, from Margot Wirth of CalSTRS (H/T again to Reuters):

– CalSTRS has a “very high exposure to those types of funds”, and will be reducing them going forward
– “Those vintages are not going to end up terrible” in terms of financial returns
– “2005 to 2008 account for 65 percent of the portfolio’s estimated $21 billion private-equity exposure”
– “many of those funds have performed poorly relative to benchmarks”
– CalSTRS “plans to put more emphasis on small and mid-market buyout, debt-related and emerging market funds”
– “Room for the pivot will be made by reducing the size of commitments to large buyout funds”
– CalSTRS “already has exposure to emerging managers and niche strategies through its $818 million Private Equity Proactive Portfolio. That program had been managed by a dedicated staff operating independently of the rest of the private equity team for most of the last decade. CalSTRS has spent the last year integrating that staff into its main private equity team, moving Proactive opportunities through the same due diligence process used for larger, more established managers.”

There you have it. As detailed and clear a discussion as a stakeholder could hope for about the state of the allocation and the plans for the near term. Via the media. Imagine what we’d learn if the Canadian scribes did a little less cheerleading and a bit more analysis about one of the largest buckets of investment capital the world over.

What we can deduce, according to CalSTRS, is that many of CPPIB’s 2005-2008 mega private equity commitments “have performed poorly relative to benchmarks.” Funds that Ms. Wirth is referring to likely include many of the big names, as these are PE vehicles that both CPP and CalSTRS are currently invested in (based upon public disclosure):

Apax Europe VII (2007), Apollo VI (2005), Apollo VII (2007), Blackstone Capital Partners V (2005), Blackstone Capital Partners VI (2008), CVC European Equity Partners V (2008), First Reserve Fund XI (2006), First Reserve Fund XII (2008), FountainVest China Growth Fund (2008), Hellman & Friedman Capital Partners VI (2006),
Hellman & Friedman Capital Partners VII (2009), Hony Capital Fund 2008 (2008), Onex Partners III (2008):, Providence Equity Partners VI (2006), TPG Partners V (2006), TPG VI (2008), and Welsh, Carson, Anderson & Stowe X (2005).

We have billions and billions in these funds. Not that this is news to you, since you were well apprised as we went from allocating $1-$2 billion to external private equity funds to $8 billion per annum around the time that Mark Wiseman took over as SVP and Head of CPP Private Investments (see representative prior posts “Doubling Down on Private Equity at CPP Investment Board” Feb 20-09 and “61% of CPPIB Private Equity Commitments sampled are currently below solvency threshold” May 21-13). CalSTRS wasn’t the first big pension plan to make the point that we’d bought a bad batch, but they are definitely the first that I’ve seen who are actually investors in these particular funds. AIMCO’s CEO beat them to the punch, but CalSTRS deserves full credit for not mincing words (see prior post “AIMCo’s take on PE marks stark contrast to CPPIB” Aug 24-11).

Some will say that it isn’t Mr. Wiseman’s fault that 2005-08 turned out to be substandard vintage years for the mega buyout world. I agree, but the CPPIB’s team did dramatically increase our allocation — in both relative and absolute terms — to this asset class at absolutely the wrong time. Again, who knew? But the management and Board of Directors continue to refuse to provide clear disclosure about the true IRR financial performance of these funds, unlike CalSTRS, CalPERS, Oregon, WSIB and so forth (see prior representative post “CPPIB should take a page from Oregon’s book” Sept. 12-10). That can’t be blamed on back luck or third party LBO managers.

As for putting more of a focus on smaller and more diverse fund strategies, which is clearly underway at CalSTRS, CPPIB has been going the opposite way for as long as I can remember. This has always been a key concern of mine, as longstanding readers may recall. From 2007:

I cannot accept the argument that they are now “too big” to directly back Canadian VC funds. It takes just a few hours a year to monitor a fund once you’ve done the initial due diligence and made the commitment.

CalSTRS is making changes in how it interacts with smaller funds too, as they have taken steps to directly manage the “emerging manager”, small cap PE or VC universe, rather than outsource that to a Fund-of-Fund manager, ala CPPIB.

Most fascinating of all perhaps, is that CalSTRS is admitting to these concerns, and making immediate adjustments, despite turning in a return of 18.7% in its most recent fiscal year. Well ahead of CPPIB’s 16.5% number. Over a 10 year basis, CalSTRS’ return is 60 basis points higher than CPPIB’s (7.7% versus 7.1%); with that kind of enhanced performance, CPP could reduce payroll taxes for Canadian employers and workers, for example.

Sixty bps is quite the incremental value-add over an extended period. I can’t be sure if the premium performance directly leads to more transparency around how the assets are doing, but Canadians definitely benefit from the U.S. culture of complete disclosure from many of their pension stewards (see representative prior post “12 questions CPP Investment Board won’t be answering on BNN today” Jan. 17-13).

And for that we are grateful.

MRM