Calstrs just got a lot more nimble in its ability to participate in co-investments.
On Wednesday, the investment committee of the $300 billion-plus portfolio approved a policy revision that will free investment staffers from a requirement to seek third-party approval on co-investment deals valued below $250 million.
The change marks a major step forward in the pension’s adoption of its collaborative mode, former chief investment officer Christopher Ailman’s vision for a more advanced and larger private-equity portfolio that emphasizes co-investments and direct investments.
Investment staff argued that the revision will allow them to move more quickly on closing hyper-competitive deals on potentially highly-lucrative assets with the best general partners.
Previously, Calstrs’ policy required investment staff pursuing co-investments to have an independent fiduciary approve the valuation of the transaction. This practice is unusual among Calstrs’ peers, including other pension funds and sovereign wealth funds, and added to the expense of the due diligence process for Calstrs, private equity investment staffers said.
While the requirement added a layer of risk control, it put Calstrs at a disadvantage when competing with other major investors for the strongest co-investment deals with top-quartile managers, said Margot Wirth, Calstrs’ director of private equity.
“Partners ask us, ‘hey, do you want to come into the deal?’ And we say, ‘yes we do and also, we want to bring a third party with us,’ and they say, ‘what the heck is this?’” Wirth told the investment committee.
The slow process also created anxiety for general partners, who grew increasingly worried that the terms of a deal would leak to the public as time went on, according to documents presented to the investment committee.
The policy change, which the investment committee adopted swiftly, will support the growth of Calstrs’ collaborative model.
Implemented in 2018, the model uses co-investments to decrease the cost of management fees and incentives, like carried interest, that GPs charge the pension plan.. Private equity firms typically offer low- and no-fee agreements on co-investment opportunities as a way to incentivize their investors to underwrite large deals done outside of a traditional fund structure.
The investment staff’s argument for the adoption of this revision hinged on the idea that because Calstrs has built out a sophisticated co-investment operation, it no longer needs the guardrails of a third-party valuation provider on smaller deals.
Since the pension’s adoption of the collaborative model, Calstrs has built out its co-investing platform from a handful of co-investments to nearly 100 deals, Wirth said. The pension also brought on two dedicated co-investment portfolio managers.
“We have a world-class team now,” Wirth said. “It’s time to take off the training wheels.”
Featured image by Janet Kopper/Getty Images
