CalPERS the US largest public pension fund with assets totaling $131bn (E121bn) will have to disclose the performance of all of its venture capital investments.
The move is very significant, because CalPERS is one of the world’s largest investors in the $600bn venture capital (VC) industry; and other public institutions are likely to follow its lead, both in the US and in Europe. But the decision made last March by CalPERS’ 13-member board was not spontaneous. It came three months after the Californian fund settled a lawsuit with the
Mercury News, a local newspaper which had argued that the public has the right to know how the fund is investing its money. Moreover, a full disclosure was approved after a detailed report by the same paper about political and financial ties between some fund’s leaders and venture capitalists.
Under fire were both the potential conflict of interests and the alleged poor performances in the fund’s alternative investment management programme (AIM). Under this programme Cal-PERS has $19.4bn in 342 private equity and venture capital funds: $9.5bn has already been invested, representing 7.25% of the total assets, in line with the new target asset allocation that was established last October (the previous target for private equity investments was 6%). “CalPERS officials expect to be rewarded in the long-term with higher returns for the fund,” explained the chairman of CalPERS Investment Committee, Michael Flaherman, who afterwards left the fund to become senior adviser at New Mountain Capital, a venture capital firm based in New York. New Mountain Capital is one of the companies whose managers, according to the Mercury News, donated thousands of dollars for the political campaigns of State Treasurer Phil Angelides and State Controller Steve Westly, two of CalPERS board’s members. But as the donations were properly disclosed, they point out that there is no conflict of interests.
So CalPERS has decided to publish on a quarterly basis (starting by the end of April), internal rate of returns (IRR’s) for all its funds and fund of funds, and amounts of cash invested and profits realised. But it will not reveal the identities and performance of private companies that make up investments of each fund because its release could harm CalPERS’s ability to invest in the funds, according to CalPERS managers. “We intend to provide the highest level of transparency that will not conflict with our fiduciary duty to our members to maximise investment returns,” says Sean Harrigan, president of the board.
“We believe our policy goes further than any other initiative in the US,” boasted Rob Feckner, chair of CalPERS Investment Committee. “It may be a policy that is appropriate on a broader basis. We look forward to encouraging that evolution with other institutional investors. We hope our policy creates a starting point for others to consider adopting policies that will work for them as well”.
Several other institutional investors have followed CalPERS’ lead in releasing fund performance data, including the California State Teachers Retirement System. The trend is stirring some concerns among venture capital and buyout executives.
The performance analysis currently available on CalPERS’ website shows data as of September 30, 2002: net IRR of all partnership is 9.34% with better results for early investments. Those made from 1990 to 1997 have IRR ranging from 7.5% to 21.6%; from 1998 to 2001 returns are negative with a loss of 15% for partnerships committed in 2000, the worst year. In 2002 only $61.5m were invested and in nine months their value increased by 22.8%. “As of September 30 the average age of AIM investments was 3.4 years. Consequently, a majority of the portfolio is in the early stage of its life, when payment of fees has not been offset,” warns a note on the website. “Final performance of a private equity investment cannot be determined until the fund is fully exited, which is typically in 10-12 years.”
A number of venture capitalists have clamoured to keep their numbers private. But now the new disclosure by CalPERS and other US pension funds will promote a broad discussion in the industry and a greater level of competition among VC managers.