The giant Dutch scheme ABP is not the first large pension fund to encourage innovative asset management firms and invest in them. Another very well known fund, actually the largest in the world, the $170bn (e187bn) Calpers (California Public Employees’ Retirement System), took this decision in early 1999.
The main difference is that Calpers didn’t choose a big player – like State Street – as external partner in the initiative. The innovative programme is still at a very early stage, but its philosophy and first steps make a very interesting case history .
Two years ago Calpers established its Manager Development Program (MDP), committing up to $4bn. The goal of the MDP is, reads a press release, “to achieve superior investment returns while providing opportunities to new and emerging money managers that typically do not have the stature, long-time track record, business expertise and marketing clout to compete against larger, more established firms”. In practice, Calpers selects emerging money managers, gives them assets to invest and takes a significant minority equity position in the firms.
“There are a lot of talented smaller money management firms that with the assistance and support of Calpers and our programme partners will provide us with superior investment returns,” explained Charles Valdes, chair of the Calpers board’s investment committee. The “superior investment returns” are expected to come both from the growth in the value of assets being managed and from the growth in the value of Calpers’ equity positions in the firms. The investment phase, in which firms and individuals are chosen as money managers, is expected to last up to three years. As the firms grow and mature, the fund will try and realise profits from its equity positions when a firm goes public or when its stake is purchased by others.
Calpers selected Strategic Investment Group (SIG) of Washington, DC and Progress Highcrest Advisors to actively manage the new programme. SIG develops investment strategies for more than 300 clients; its president, CEO and co-founder is Hilda Ochoa-Brillembourg, a former World Bank chief investment officer. Highcrest Advisors is a joint venture between two California-based firms, Progress Investment Management (a multi-managers investment management specialist) and Putnam Lovell Capital Partners (the private capital affiliate of investment bank Putnam Lovell Securities).
Under the MDP, Calpers’ two partners will each receive up to $2bn of pension assets to invest. The managing partners will either find talented smaller existing money management firms (with less than $1bn under management) or fund the start-up of new firms with high potential. The partners will also assist the firms by providing assistance and support in business management, accounting, technology infrastructure, marketing, and other services that are needed to succeed.
Calpers and its MDP partners defined some flexible criteria to select the emerging firms (the list can be browsed at the website
q willingness to engage in a natural partnership between an individual and/or several individuals in need of some business know-how, institutional credibility, assets under management and working capital support;
q a reliable pro forma or verifiable performance history and a well articulated investment philosophy and insight;
q a credible and well-articulated business plan, including financial projections, and historical data, if applicable;
q an identifiable competitive advantage allowing the firm to overcome the risks of take off (best practices or best times);
q a high probability of achieving high absolute and relative returns (above 30% IRR in five to seven-year horizon, including both returns from managed accounts and investor equity and working capital returns);
q ability to attract significant, institutional clientele within 12 months;
q high likelihood of breakeven in 12 months;
q evidence of strong business and management leadership abilities;
q capable of building a lasting team effort;
q a common understanding of potential exit strategies within a five to seven-year time frame;
q ability to think creatively and solve problems (focused but adaptable);
q superior communications skills;
q highest personal and professional integrity;
q potential for multiple, compatible product lines.
The selected investment firms will manage only marketable asset for Calpers. In particular, no real estate, commodities, natural resources or other non-financial assets are allowed. Derivatives are to be used exclusively for hedging. Hedge funds will only be considered on a case-by-case basis.
So far, Progress Highcrest Advisors has selected two emerging investment firms – Arrowstreet Capital and Broadmark Asset Management ; SIG has selected one, Golden Capital Management. The three firms were all founded in 1999.
In June 2000 Arrowstreet Capital was the first firm chosen to manage $100m. Calpers also invested $3m to acquire an equity stake in the Cambridge, Massachusetts-based firm, which had $200m in assets under management.
In December 2000, the second investment was in Broadmark: a total of $2.7m to buy a participation in the firm, plus $100m in assets to manage under the firm’s large-cap growth equity portfolio. Broadmark is a California and New York firm specializing in traditional growth equity and alternative investment strategies, with over $150m under management (not including Calpers assets).
The third commitment, also in December, was in Golden Capital, which received a $200m US equity mandate plus an investment in its capital (the amount was not disclosed). Golden, headquartered in Charlotte, North Carolina, was formerly a division of Smith Asset Management Group, LP, which will retain a minority interest in the new firm; before the Calpers mandate, it had $200m of assets under management.