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Term Sheet — Friday, September 4

Random Ramblings (sorry, this is a long one)

The California Public Employees’ Retirement System (CalPERS), the nation’s largest public pension with $296 billion in assets under management, in 2011 made a bold move to restore credibility to a private equity investment program that had been beset by scandals so severe that the pension’s former CEO would plead guilty to bribery and a former board member would take his own life. It hired Real Desrochers, a well-respected industry veteran who had spent more than a decade leading alternative investments for the nation’s second-largest public pension system (which also happens to be in California).

Now, more than four years later, CalPERS again has private equity problems. And, stunningly, they revolve around Desrochers’ knowledge of how private equity works.

Before continuing, I should be clear that the current issues are not nearly of the same caliber of yesteryear’s kickback scandals. No one is being accused of crimes or civil malfeasance. Instead, this is about competence, transparency and $29 billion of public pension assets.

The bloom began coming off the rose earlier this summer, after CalPERS investment staff acknowledged that it “could not track” the incentive fees (i.e., carried interest) that it had paid out to investment managers. In reality, the situation was more than CalPERS had chosen not to track such payments — a defensible decision, if only CalPERS hadn’t disingenuously shrouded it in a cloak of impossibility .

But the real trouble began on August 17, during what should have been a routine CalPERS investment committee meeting. Desrochers had been asked to make a presentation about how private equity funds work, for the benefit of committee members without capital markets backgrounds.

After he did so, board member JJ Jelencic — who does have investment experience, and is viewed by many on CalPERS staff as an antagonist — began to ask some pointed questions about some of the things that Desrochers’s 30,000 foot presentation appeared to have glossed over. Namely, such structural items as fee waivers (in which general partners effectively sidestep taxes by replacing part of their own fund commitments with management fees), hurdles (i.e., the level of performance a fund must achieve before generating carried interest) and fee offsets (portion of ancillary fees — typically charged to the portfolio company — that the GP collects in lieu of fund management fees).

Unfortunately, things quickly went off the rails. Jelencic first asks if, when viewing the pension’s comprehensive annual financial report (CAFR), he should assume that a PE fund’s net return is net of all fees (not just 2/20, but additional operating fees like legal, auditing, etc.). Desrochers responded by saying “I don’t know,” and then returning to his high-level fee dissertation.

Let’s just stop there for a moment. The head of private equity at CalPERS said he doesn’t know if “net of fees” is really net of fees. This is pretty important, given that CalPERS regularly touts howDesrochers has reduced the amount of fees that CalPERS is paying to its private equity managers.

In Desrochers’ defense, Jelencic’s question was about one particular fund, but shouldn’t the CAFR reporting be standardized? Moving forward, Jelencic broadens his question to try to understand how CalPERS sometimes is paying less than its 2% on committed capital. The obvious answer is fee offsets, but Desrochers doesn’t volunteer it.

Then comes the most bizarre exchange, as transcribed by the Naked Capitalism blog (which first noticed all of this and posted the relevant video clips). In it, Jelincic is giving a hypothetical example of a managing fee offset:

Jelincic: Management fee is $100. The fees to the portfolio company is $50. There is a 100% offset to the LPs. So what then happens is that the GP has collected $50 from the portfolio companies, and he will collect the other $50 from the LPs, because that part has not been offset. So he will have collected the $100. Correct?

Desrochers: No. He will collect $50.

Jelincic: So if he, if the management fee is $100, he collects $50 from the portfolio companies…

Desrochers: No, he offsets the management fee of $100 by the $50 million dollars that he collected from the portfolio companies.

Jelincic: OK, so he offsets $50 of the management fee. What happens to the other $50 of the management fee?

Gogan: It’s paid by the limited partners.

Jelincic: OK, so the GP ultimately gets $100. He gets $50 from the portfolio companies, $50 from the LPs. Right?

Desrochers: No.

Unfortunately, that last answer from Desrochers should have been “yes.” And while the exchange may seem confusing to those who don’t negotiate private equity contracts, it should not have been to a 30-year veteran of the industry (particularly one who had advance notice of this general line of questioning, as I’m told Desrochers did). Particularly one who has made “fees” the cornerstone of his tenure.

Naked Capitalism‘s blog post went up this past Monday, and included on-the-record statements from private equity folks that were stunned by Desrochers’ performance (and, it should be noted, I’ve since received similar correspondence). Sources tell me that CalPERS on Monday held a previously-unscheduled meeting with senior staff (including the pension’s CEO, CIO and general counsel) and Desrochers (it’s unclear if other PE investment staff attended) to discuss various issues within the private equity portfolio, but largely centered around what had happened during the investment committee meeting. It is notable that the meeting was called after the blog post appeared, not after the actual meeting (which had occurred 14 days earlier).

I reached out to CalPERS on Tuesday, and that evening received some milquetoast comments about general investment performance. Last night, a system spokesman acknowledged that Desrochers had made “some regrettable mistakes,” particularly around the 50 vs. 100 issue. No explanation as to why the mistakes were made. At the same time, however, the spokesman found it “absurd” that anyone would question Desrochers’ understanding of private equity, given his long career in the industry.

For me, this is where it gets tricky. I have never spoken to Real Desrochers. And it’s not for a lack of trying. I asked to interview him when he first got the job, when the carried interest issue arose and now this week (plus, I believe, at least one other time). Always denied. In fact, I can find only one media interview ever with Desrochers since he took over at CalPERS, in a trade publication that asked about what kinds of funds he was interested in backing.

To be clear, I realize that neither I nor other reporters are entitled to speak to Desrochers. CalPERS has regularly made others, including CIO Ted Eliopoulos, available. But it’s always been strange that the man who was brought in to make CalPERS more transparent and responsible is either scared of the media or considers it to be beneath him. And, as I explained to the CalPERS spokesman, it leaves me with only Desrochers’s public testimony with which to judge his understanding of fee offsets and the like. And that testimony was factually wrong.

I do find it almost impossible to believe that a man running $29 billion on the behalf of pensioners doesn’t understand some fundamental truths of how that money is being invested. Almost.

• Publishing note: Term Sheet will be off on Monday for the Labor Day holiday. Have a great long weekend!


 Bohai Leasing (SZSE: 000415) has agreed to acquire 100% of U.S. aircraft leasing company Avolon Holdings Ltd. (NYSE: AVOL) for $7.6 billion in cash, or $31 per share.

Sellers include Cinven (18.8% stake), CVC Capital Partners (17.36%), Oak Hill Capital Partners (15.91%) and GIC (15.36%). Read more.


• Letgo, a New York and Barcelona-based marketplace app, has raised $100 million in a Series A round of funding from Naspers Limited. Read more.

• ADC Therapeutics, a Switzerland-based developer of antibody drug conjugates targeting cancer, has raised $80 million in equity funding from backers like Auven Therapeutics and AstraZeneca.

• Kiswe Mobile Inc., a Bethesda, Md.-based developer of mobile apps for watching sports, has raised over $10 million in new VC funding, according to a regulatory filing. No investor information was disclosed.

• Roost, a Sunnyvale, Calif.-based maker of a smart battery for smoke alarms, has raised $5.5 million in Series A funding. RPM Ventures led the round, and was joined by USAA and return backer DCM.

• Varsity News Network, a Grand Rapids, Mich.-based sports IT platform for high school athletic departments, has raised $3.7 million in new funding. Arsenal Venture Partners led the round, and was joined by North Coast Technology Ventures, RSL Venture Partners, Start Garden, Nir Arkin, Detroit Innovate, Grand Angels, Northern Michigan Angels, the Michigan Angel Fund and Avram Grant.

• Bindle Chat, a Woodside, Calif.-based group chat messaging startup, has raised $2.5 million in VC funding, according to a regulatory filing. No investor information was disclosed.

• Zuoyebang, a Baidu-owned platform for homework assistance, has raised an undisclosed amount of Series A funding from Sequoia Capital and Legend Capital. Read more.


• Kelso & Co. has agreed to acquire Sirius Computer Solutions Inc., a San Antonio, Texas-based IT solutions integrator, from Thoma Bravo. No financial terms were disclosed, except that the company is expected to generate $1.6 billion in 2015 revenue.

• KPS Capital Partners, SK Capital Partners and Triton Advisers have made it to the second round of bidding for Polynt, an Italian chemical maker being sold by Investindustrial for upwards of $946 million, according to Bloomberg. Read more.

• Levine Leichtman Capital Partners has acquired Monte Nido Holdings LLC, a Malibu, Calif.-based provider of treatment for eating disorders and exercise addiction, from Centre Partners. No financial terms were disclosed.

• Providence Equity Partners and PT Indosat Tbk are the remaining bidders for a majority stake in PT Link Net Tbk, an Indonesian TV and broadband operator, according to Reuters. The deal could be valued at upwards of $1 billion. Read more.

• SurgCenter Development, a Pismo Beach, Calif.-based operator of ambulatory surgery centers, has hired Greenhill & Co. to handle a sale process that has attracted private equity interest, according to LBO Wire. The company is expected to generate more than $142 million in EBITDA during its current fiscal year, which means a buyer may pay upwards of $1.5 billion.

• Walker Advertising, a San Pedro, Calif.-based provider of legal marketing services, has raised an undisclosed amount of private equity funding from ClearLight Partners.


• PointClickCare, a Canadian electronic medical records software company, has filed for a $100 million IPO. It plans to list on the Nasdaq under ticker symbol PCLK, with J.P. Morgan, Goldman Sachs and RBC Capital Markets serving as lead underwriters. The company reports $268,000 in net income on nearly $59 million of revenue for the first half of 2015, compared to a $5.3 million net loss on $48 million of revenue for the year-earlier period. Shareholders include JMI Equity (25.8% pre-IPO stake).


• 3i Group is preparing to launch a sale process for Mayborn Group, a UK-based maker of baby products under the Tommee Tippee brand, according to Sky News. The company could be valued at around £275 million. Read more.

• Allergan PLC (NYSE: AGN) has agreed to acquire AqueSys Inc., an Aliso Viejo, Calif.-based developer of gel stent technology for treating glaucoma. The deal includes a $300 million upfront payment and unspecified earn-outs. AqueSys had raised around $90 million in VC funding from firms like Accuitive Medical Ventures, The Carlyle Group, Longitude Capital, Rho Ventures, and SV Life Sciences.

• Amazon (Nasdaq: AMZN) has agreed to acquire Elemental Technologies, a Portland, Ore.-based provider of video processing solutions. No financial terms were disclosed, but The Information reports a $500 million cash price-tag. Elemental Technologies had raised around $44 million in VC funding from firms like General Catalyst, Norwest Venture Partners, Voyager Capital, Luminari Capital, and Telstra Ventures. Read more.

• Charterhouse has hired Deutsche Bank to find a buyer for its 60% stake in French call center operator Webhelp, according to Reuters. The deal could value Webhelp at between $800 million and $900 million. Read more.

• Thumbtack, a San Francisco-based marketplace for home services, has acqui-hired HeartThis, a meta ecommerce discovery engine. No financial terms were disclosed. Thumbtack last year raised $100 million in VC funding from firms like Google Capital, Tiger Global Management, Javelin Venture Partners and Sequoia Capital. HeartThis had been seeded by firms like Freestyle Capital, 500 Startups, Google Ventures and Founder Collective. Read more.


• Cipla Ltd., an India-listed pharmaceutical company, has agreed to acquire U.S. generic drug companies InvaGen Pharmaceuticals Inc. (Hauppauge, N.Y.). and Exelan Pharmaceuticals Inc. (Lawrenceville, Ga.) for a total of $550 million. Read more.

• Constellation Software Inc. (TSX: CSU) has agreed to acquire Market Leader, a suite of online tools for real estate agents and brokers, from Zillow (Nasdaq: ZG) for $23 million. Trulia Group, which Zillow acquired earlier this year, originally paid $355 million to acquire Market Leader in 2013. Read more.


• Bernhard Capital Partners, a new energy-focused private equity firm formed by former executives of The Shaw Group, is targeting $750 million for its debut fund, according to peHUB. Read more.

• Core Ventures Group, a Santa Clara, Calif.-based seed-stage investment firm, is raising upwards of $25 million for its second fund, according to a regulatory filing. It already has secured more than $7 million.

• GoldPoint Partners (f.k.a. New York Life Capital Partners) has raised $300 million for its fourth mezzanine investment fund, according to a regulatory filing. It is unlikely to be a final close, as the firm’s prior mezzanine fund closed on just over $1 billion in 2010.

• Shamrock Capital Advisors, a Los Angeles-based private equity firm, is raising upwards of $250 million for what it is calling the Entertainment IP Fund, according to a regulatory filing. No additional information was disclosed.


• Max Schireson, who stepped down as chief executive officer of database software provider MongoDB last year to spend time with his family, has joined Battery Ventures as an executive-in-residence. Read more.

• Howie Xu has joined Greylock Partners as an executive-in-residence. He previously spent time with Cisco and Big Switch Networks, before which he was head of networking R&D for VMWare. Read more.

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