Calpers plans multibillion-dollar push into venture capital

Calpers, the biggest public pension scheme in the US, is planning a multibillion-dollar push into international venture capital as the $442bn fund tilts towards riskier asset classes in a hunt for higher returns after a “lost decade”.

The California-based scheme set out its plans to expand its venture capital allocation in a review of its $52bn private equity portfolio, published on Friday. As part of the shake-up the fund plans to expand its investments in Europe and Asia.

Calpers could put as much as $5bn in new money into venture capital, scheme officials said. That would make it one of the single largest US investors in the sector at a time when many funds are struggling to raise new money. Total venture funding fell 35 per cent last year to $445bn, according data company Crunchbase.

“If you look at the highest performing private equity programmes, many of those have extremely high proportions of their private equity portfolio in venture,” Anton Orlich, Calpers’ managing investment director for growth and innovation, told the Financial Times.

“So bearing that in mind, Calpers should be participating more in venture.”

Currently, 73 per cent of the private equity portfolio is allocated to “buyout” — buying assets and selling them at a profit; followed by 20 per cent to assets that generate returns through capital growth or dividends. Around 1 per cent of the portfolio is in venture capital.

The review document did not say by how much Orlich’s team wants to build out the venture capital programme. But it could be ramped up, over time, from around $800mn currently to around $5bn, with the allocation to be eventually set by Calpers’ board, according to scheme officials.

The proposal comes as Calpers seeks to make up for what Orlich described as a “lost decade” of returns stemming from a decision to put the pension plan’s private equity programme on hold between 2009 and 2018.

Nicole Musicco, appointed Calpers’ chief investment officer in 2022, estimates this cost up to $18bn of returns.

Plans for the portfolio shake-up come two months after Calpers conceded it had probably lost around $77mn on its investments in Silicon Valley Bank and Signature Bank, both of which collapsed earlier this year. 

Orlich stressed that the venture capital push was not just about returns but also diversification, particularly in a period where the market expects higher interest rates. He added that venture capital was an asset class that did not have leverage “in a period where higher costs are going to put pressure on buyout returns”.

Venture capital is regarded as higher risk because finance is provided to unproven start-ups and small businesses so returns take longer to materialise.

Orlich stressed the new strategy would involve working with high quality managers, ramping up the co-investment programme and “consistent” deployment of cash over time. In spite of investing in private markets, a higher costs asset class, Orlich said he was confident significant savings could be made through a shift to co-investments with no fees or outperformance payments.

Private equity has been the highest performing asset class in the Calpers portfolio, returning 21.3 per cent for the fiscal year ending June last year.

However, over the 12 months to March this year the private equity portfolio was down 4.7 per cent, according to documents published last week. This compared with its benchmark, which was down 16.9 per cent, and a 17.7 per cent fall in the MSCI world equity index.

Orlich said that there was “appetite” within the investment team to take the private equity allocation above its current 13 per cent target of the overall portfolio.

“This is being discussed,” said Orlich.

In his previous role as head of alternative investments at healthcare services company Kaiser Permanente, Orlich grew the alternatives allocation from 15 per cent to more than 50 per cent for a portfolio of more than $100bn.