CalPERS creates internal committee to assess direct deals

California Public Employees’ Retirement System took another step in its direct investing push through the creation of a new internal committee along with a recent shakeup of its investment team structure.

CalPERS is overhauling its private equity program, which includes a focus on direct investing – something the nation’s largest pension system has considered for some time.

CalPERS CIO Nicole Musicco said earlier this year the system lost up to $18 billion in a “lost decade” of underallocating to private equity. CalPERS increased its target to private equity to 13 percent from 8 percent in November 2021.

CalPERS staff earlier this year introduced changes to its private equity program that would increase the limits of private equity, co-investment and secondaries investments staff can make without investment committee approval, among other changes.

Tucked into discussions at recent meetings about proposed changes was a mention of a newly created internal investment underwriting committee.

According to Musicco’s remarks at the September CalPERS investment committee meeting, the new investment underwriting committee oversees potential investment decisions over a certain dollar threshold. The committee consists of each head of every asset class, with Musicco serving as chair.

But at CalPERS’s November meeting, Musicco spoke at length about how the investment underwriting committee will help develop the system’s direct investing strategy.

“We are an organization where we are still kind of in the early innings of developing the muscle of being able to do direct investments,” Musicco said.

Musicco said that including all directors of asset classes allows the underwriting committee to have the “right eyeballs around the table to make sure that we have the diversity and the decision making across the different talents that we have.”

“If we’re looking at an opportunity in private equity, but we happen to have real bench strength on the sector we’re considering sitting in fixed income or in private credit, why wouldn’t we bring that knowledge and insight to bear in the debate,” Musicco said.

But Musicco also emphasized how the underwriting committee would help CalPERS develop its direct investing program.

“The intent is that over time we build more muscle in direct investing across the asset classes, but that’s going to take time,” Musicco said.

According to Musicco, staff first consider the viability of an opportunity before crafting a ‘head’s up’ memo, where the deal team presents the idea to the investment underwriting committee.

If the proposed deal passes the underwriting committee’s “smell test,” investment staff then conducts further diligence on the potential deal. Once completed, the proposed deal would then come before the underwriting committee for a final vote, Musicco said.

Musicco said she has veto power on the underwriting committee’s decision.

The recent hiring of Anton Orlich to head the system’s growth and innovation program, which was merged into the private equity program in late November, also reflects CalPERS’s commitment to direct investing.

The recent hiring and changing of position decisions also reflects CalPERS’s commitment to direct investing.

“Having someone in this position like Anton who has deep direct deal experience and fund experience will help us going forward,” Musicco said at the November investment committee meeting.

Orlich previously served as the head of alternative assets at Kaiser Permanente.