Harvard Case - CalPERS Private Equity 2.0
"CalPERS Private Equity 2.0" Harvard business case study is written by Josh Lerner, John D. Dionne, Alys Ferragamo. It deals with the challenges in the field of General Management. The case study is 27 page(s) long and it was first published on : Feb 10, 2023
At Fern Fort University, we recommend CalPERS adopt a multifaceted approach to Private Equity 2.0, focusing on strategic partnerships, innovative investment strategies, and a robust governance framework. This approach will maximize returns while mitigating risks and ensuring alignment with CalPERS's mission of providing secure retirement benefits for its beneficiaries.
2. Background
This case study focuses on the California Public Employees' Retirement System (CalPERS), one of the largest public pension funds globally. Facing increasing pressure to generate higher returns, CalPERS seeks to revamp its private equity strategy, dubbed 'Private Equity 2.0,' to address evolving market dynamics and achieve its financial goals.
The main protagonists are:
- CalPERS Board of Administration: The governing body responsible for overseeing CalPERS's investments.
- CalPERS Investment Staff: The team tasked with implementing the investment strategy, including the private equity portfolio.
- Private Equity General Partners (GPs): The firms managing CalPERS's private equity investments.
3. Analysis of the Case Study
Strategic Framework: This analysis utilizes a combination of frameworks, including Porter's Five Forces, SWOT analysis, and a Balanced Scorecard, to comprehensively evaluate CalPERS's situation.
Porter's Five Forces:
- Threat of New Entrants: The private equity market is competitive, but barriers to entry are high.
- Bargaining Power of Buyers: CalPERS, as a large investor, holds significant bargaining power.
- Bargaining Power of Suppliers: GPs have some bargaining power due to their expertise and networks.
- Threat of Substitutes: Alternative investment strategies, such as real estate or infrastructure, pose a threat.
- Competitive Rivalry: The private equity landscape is highly competitive, with numerous firms vying for investments.
SWOT Analysis:
Strengths:
- Scale and Resources: CalPERS's size allows for significant investments and access to exclusive opportunities.
- Experienced Investment Team: CalPERS has a dedicated team with expertise in private equity.
- Long-Term Investment Horizon: CalPERS's long-term focus allows for patient capital allocation.
Weaknesses:
- Complexity of Private Equity: Navigating the complexities of private equity investments requires specialized knowledge.
- Limited Transparency: Private equity investments often lack transparency, making performance assessment challenging.
- Potential for Conflicts of Interest: GPs may have incentives that conflict with CalPERS's interests.
Opportunities:
- Emerging Markets: Expanding into emerging markets offers potential for higher returns.
- Technology and Innovation: Investing in technology-driven companies and innovative strategies can drive growth.
- Sustainable Investments: Focusing on environmentally and socially responsible investments aligns with CalPERS's values.
Threats:
- Economic Downturn: Recessions can significantly impact private equity returns.
- Regulatory Changes: Changes in regulations can impact the private equity industry.
- Competition from Other Investors: Increased competition from other institutional investors can drive down returns.
Balanced Scorecard:
CalPERS can leverage a Balanced Scorecard to measure its performance across four key perspectives:
- Financial: Return on investment, fund performance, and risk management.
- Customer: Beneficiary satisfaction, communication, and transparency.
- Internal Processes: Investment due diligence, portfolio management, and operational efficiency.
- Learning and Growth: Employee development, innovation, and knowledge sharing.
4. Recommendations
1. Strategic Partnerships:
- Form strategic alliances with leading GPs: CalPERS should partner with GPs who share its values and have a proven track record of success.
- Develop co-investment opportunities: Collaborate with other institutional investors to access larger deals and diversify risk.
- Engage in joint ventures: Partner with GPs to create new investment vehicles and explore emerging markets.
2. Innovative Investment Strategies:
- Focus on thematic investing: Invest in sectors with high growth potential, such as technology, healthcare, and renewable energy.
- Explore alternative asset classes: Expand beyond traditional private equity into areas like venture capital, real estate, and infrastructure.
- Embrace data-driven decision-making: Utilize AI and machine learning to analyze market trends and identify investment opportunities.
3. Robust Governance Framework:
- Strengthen due diligence processes: Develop rigorous due diligence processes to assess GP capabilities and investment proposals.
- Enhance transparency and reporting: Improve communication and reporting to ensure transparency and accountability to stakeholders.
- Implement conflict of interest protocols: Establish clear protocols to mitigate potential conflicts of interest between CalPERS and GPs.
5. Basis of Recommendations
These recommendations are based on a thorough analysis of CalPERS's current situation, considering:
- Core competencies and consistency with mission: The recommendations align with CalPERS's mission of providing secure retirement benefits and its commitment to responsible investing.
- External customers and internal clients: The recommendations prioritize stakeholder interests, including beneficiaries, employees, and the public.
- Competitors: The recommendations aim to position CalPERS as a leading investor with a competitive edge in the private equity market.
- Attractiveness ' quantitative measures: The recommendations are expected to enhance returns and mitigate risks, leading to improved financial performance.
All assumptions are explicitly stated, including the need for a robust governance framework, the potential for growth in emerging markets, and the importance of data-driven decision-making.
6. Conclusion
By adopting a strategic approach that emphasizes partnerships, innovation, and governance, CalPERS can transform its private equity strategy and achieve its financial goals. This approach will ensure that CalPERS remains a leading investor in the private equity market while fulfilling its mission of providing secure retirement benefits for its beneficiaries.
7. Discussion
Alternatives not selected:
- Passive Investing: While a simpler approach, passive investing in private equity may not generate the same returns as active management.
- Direct Investing: Direct investing in private companies can be time-consuming and requires significant expertise.
Risks and key assumptions:
- Market Volatility: Economic downturns can negatively impact private equity returns.
- GP Performance: The success of CalPERS's investments depends on the performance of its GP partners.
- Regulatory Changes: Changes in regulations can impact the private equity industry.
8. Next Steps
Timeline with key milestones:
- Phase 1 (Year 1): Develop a strategic plan for Private Equity 2.0, including investment criteria, governance framework, and performance metrics.
- Phase 2 (Year 2): Implement new investment strategies, build strategic partnerships, and enhance due diligence processes.
- Phase 3 (Year 3): Monitor performance, evaluate results, and make adjustments as needed.
By implementing these recommendations and monitoring progress, CalPERS can successfully navigate the evolving private equity landscape and ensure a secure future for its beneficiaries.
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Case Description
Yup Kim, the Head of Investments, Private Equity at the California Public Employees' Retirement System (CalPERS), reflected on the pension fund's private equity strategy. In July of 2022, the fund was in the midst of a multi-year turnaround strategy with the goal to "consistently deploy capital at scale in order to build a diversified, cost-efficient portfolio of high-conviction investments that outperform [its] PE policy benchmark." CalPERS had also recently increased the overall allocation to private equity from 8% to 13%, making it even more critical that Kim and the private equity team achieve their goals. Moreover, CalPERS faced a global economy seemingly headed into a recession and changes within the private equity industry as a whole. Kim needed to decide if they had the right strategy in place to achieve their long-term vision. This case also explores the U.S. public pension system and private equity co-investments.
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