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

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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

SLIDE 1

July 17, 2017

Alternative Private Equity Business Models

Board of Administration Offsite JULY 2017

SLIDE 2

CalPERS Board of Administration Offsite – July 2017 2

Agenda

Initial strategic review of Private Equity at CalPERS
Role of emerging managers and value of diversity
Potential future states

SLIDE 3

CalPERS Board of Administration Offsite – July 2017 3

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 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

PE Allocation (%)

Actual Exposure to Private Equity PE Holdings as a % of the Total Fund

Reported Value to Paid in Capital Distributed Value to Paid in Capital

10,000
5,000

5,000 10,000 15,000 20,000 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Commitments and Cash Flow by Year

Commitment by Vintage Year Annual Net Cash Flow 0% 2% 4% 6% 8% 10% 12% 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

Premium (Private Equity - Public Index)

Excess Return of Private Equity over Public Equity

Rolling 10 YR Annualized Compound Return FTSE All World Russell 3000 3% Premium

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

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CalPERS Board of Administration Offsite – July 2017 4

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)

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CalPERS Board of Administration Offsite – July 2017 5

SWOT Analysis*

Strengths Weaknesses

Brand Brand Size Size Knowledge Relationships Thought Leader Legacy Portfolio Program Flexibility Governance Transparency

Opportunities Threats

Brand Headline Risk Size Size Relationships Team Retention Long-term Ownership Legacy Portfolio Platform Consistency California Regulations Spin-out Entity Competition * Hamilton Lane report for CalPERS – June, 2017

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CalPERS Board of Administration Offsite – July 2017 6

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

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CalPERS Board of Administration Offsite – July 2017 7

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

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CalPERS Board of Administration Offsite – July 2017 8

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

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CalPERS Board of Administration Offsite – July 2017 9

Private Equity Business Model Continuum

Fund of Funds Traditional GP/Funds Co-investments Direct Investment through CalPERS

wned entity

Direct investment through CalPERS staff