Alternative Private Equity Business Models July 17, 2017 Board of - PowerPoint PPT Presentation

Alternative Private Equity Business Models July 17, 2017 Board of Administration Offsite J ULY 2017

Agenda • Initial strategic review of Private Equity at CalPERS • Role of emerging managers and value of diversity • Potential future states CalPERS Board of Administration Offsite – July 2017 2

Excess Return of Private Equity over Public Equity Actual Exposure to Private Equity Rolling 10 YR Annualized Compound Return 18% 12% (Private Equity - Public Index) 16% 10% 14% PE Allocation (%) 8% 12% Premium 10% 6% 8% 4% 6% 2% 4% 2% 0% 0% Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Jun-95 Jun-96 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 FTSE All World Russell 3000 3% Premium PE Holdings as a % of the Total Fund Data sources: FTSE All World (Bloomberg), Russell 3000 (Bloomberg) and Private Equity Index (SSGX) using quarterly horizon return data from Q4 1996 to Q2 2016 Total Value to Paid in Capital by Vintage Year Commitments and Cash Flow by Year 20,000 15,000 10,000 5,000 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 -5,000 -10,000 Reported Value to Paid in Capital Distributed Value to Paid in Capital Commitment by Vintage Year Annual Net Cash Flow CalPERS Board of Administration Offsite – July 2017 3

Past Initiatives ID Project/Initiative Name/Description A Listed PE Conversus B Corporate Partnering Comcast (B1), Enron/JEDI (B2, B3) C Follow-on Corporate Partner Fund PCG Corporate Partners (C1, C2) D GP Investments Carlyle (D1), TWP (D2), TPG (D3), Yucaipa (D4), Apollo (D5), Centinela (D6), HEP (D7), Silver Lake (D8) E Seeding New FoF Grove Street (E1), Asia Alt (E2), Centinela (E3), EM Alternatives (E4), HEP (E5), PCG Int ’ l (57 Stars) (E6) F Theme Initiatives Entering Venture Capital (F1), Clean Tech (F2), HEP (F3), CA Initiative (F4, F5), CA Initiative Mezzanine (F6) G Outsourcing: Monitoring Legacy Investments LP Capital H Co-Investments Stops and Starts I Secondary Sales 6 portfolio sales (2007-2016) CalPERS Board of Administration Offsite – July 2017 4

SWOT Analysis* Strengths Weaknesses Opportunities Threats Brand Brand Brand Headline Risk Size Size Size Size Knowledge Relationships Relationships Team Retention Thought Leader Legacy Portfolio Long-term Ownership Legacy Portfolio Program Flexibility Governance Platform Consistency Transparency California Regulations Spin-out Entity Competition * Hamilton Lane report for CalPERS – June, 2017 CalPERS Board of Administration Offsite – July 2017 5

Characteristics of Successful LPs* 1. Importance of clearly articulated strategy, consistently applied (both externally and internally) 2. Brand reputation – viewed as a desirable LP 3. Staff resources with appropriate experience and consistency 4. Clear governance structure(s) providing timely and expert decision-making 5. Ongoing process of self-examination in place *taken from Professor Josh Lerner presentation, PE Workshop, November 2015 CalPERS Board of Administration Offsite – July 2017 6

Listening Tour • Process • Recurring themes: – Importance of effective governance – Talent identification – Fee trends and co-investments – Negotiation trade-offs – Insourcing vs. outsourcing – Costs of a direct investing model CalPERS Board of Administration Offsite – July 2017 7

More of what we heard • Likelihood of persistence of returns • Companies fleeing or avoiding public markets • Rate of change in an age of acceleration • Drain of public company talent to private equity • Disintermediation of talent from large GPs • Parallels to real estate business evolution • Impact of the millennial generation • Owning great companies indefinitely • Costs versus returns CalPERS Board of Administration Offsite – July 2017 8

Private Equity Business Model Continuum Fund of Direct Investment Co-investments Direct investment Traditional Funds through CalPERS through CalPERS GP/Funds owned entity staff Complexity Lower Higher Higher Costs Lower Reliance on expensive Very High Low internal talent Risk of Failure Lower Higher CalPERS Board of Administration Offsite – July 2017 9