In late 2014, the nation's largest public pension system said that it would eliminate its hedge fund program. It may have been a mistake.
The announcement by the California Public Employees' Retirement System garnered nationwide headlines, and was used by hedge fund critics as a cudgel against other public pensions that were not following suit. For its part, CalPERS said that the issue was more about scale than performance, believing that there was not enough quality supply for a system of its size to maintain an allocation.
But CalPERS seemed to change its rhetoric last week when unveiling its results for fiscal 2015 (which ended on June 30). Specifically, chief investment officer Ted Eliopoulos wrote the following in the organization's comprehensive annual financial report:
During the 2014-15 fiscal year this was witnessed by the elimination of CalPERS’ hedge fund program, and through the diligent work to negotiate more favorable terms for CalPERS with our external managers. In the 2014-15 fiscal year we saved $217 million from these and other efforts.
In other words, California's public pensioners benefited financially from the hedge fund decision. Performance emphasized over scale.
The trouble, however, is that Eliopoulos is looking at the savings in a vacuum. Yes, CalPERS paid less in hedge fund fees (the portfolio was around 75% liquidated through the end of last June, but not completely eliminated). In fact, things always cost less when you don't buy them. At the same time, however, you also don't derive any value from them. What CalPERS really needs to do is figure out how much money it would have made by maintaining its hedge fund portfolio, and then measure that against the fee savings.
CalPERS didn't include that net return math in its report. So I whipped out a pen, calculator, and the back of an envelope. Here we go:
The fair value of the CalPERS absolute return strategy (i.e., hedge funds) was $1.155 billion in the latest CAFR. That's down from $4.532 billion through June 30, 2014. In other words, it liquidated around $3.377 billion in hedge fund assets.
Now this is where it begins to get a bit tricky and, I'll readily admit, hypothetical. CalPERS reports in its new CAFR that the one-year net return for its ARS portfolio was 7.3%. This compares to 7.1% for the year-earlier period. So let's settle on 7.2% for the best number to use.
That would mean that CalPERS would have generated around $243 million in extra hedge fund returns.
Remember, the savings that Eliopoulos cited was only $217 million. More importantly, that figure included all sorts of fees not related to hedge funds (including select private equity fees). In fact, the hedge fund fee savings—including both investment management and performance fees—was only around $67 million.
What that means is that CalPERS would have generated around $176 million more for its pensioners by maintaining its hedge fund portfolio than by liquidating it. At least on a one-year basis.
Sometimes, "savings" are synonymous with "losses."
To be sure, my analysis has some arguable holes. First, hedge fund performance for calendar 2015 was lousy, so it's entirely possible that the ARS returns would have slumped over the past six months (on the other hand, CalPERS only generated one-year returns of 1% from its public equities portfolio in fiscal 2015, so perhaps its hedge funds were really constructed as a hedge). Second, we do not know exactly where cash from the liquidated hedge positions were reallocated, or the performance of said reallocation (i.e., I'm also playing in a bit of a vacuum). Finally, I'm only looking at this on a one-year basis ―namely because that's the only available post-liquidation period. For context, the 3-year and 5-year ARS returns were 7.2% and 5.1%, respectively (both well below public and private equity figures, but better than fixed income).
A CalPERS spokesman declined comment.
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THE BIG DEAL
• CarTrade.com, an India-based online auto marketplace for both new and used vehicles, has raised $145 million in new equity funding from Temasek Holdings, March Capital and return backer Warburg Pincus. Read more.
VENTURE CAPITAL DEALS
• Zerto, a Boston and Israel-based provider of disaster recovery and data management software, has raised $50 million in Series E funding. Institutional Venture Partners led the round, and was joined by Access Industries and return backers 83North, Battery Ventures, Harmony Partners, RTP Ventures, U.S. Venture Partners and Mark Leslie. www.zerto.com
• Greenwave Systems, an Irvine, Calif.-based provider of Internet of Things software and managed services, has raised $45 million in Series C funding. EDBI led the round, and was joined by Singapore Technologies Telemedia and return backers The Westly Group and E.ON. www.greenwavesystems.com
• Syros Pharmaceuticals, a Cambridge, Mass.-based developer of gene control therapies for cancer and other diseases, has raised $40 million in new VC funding. Deerfield Management Co. led the round, and was joined by Casdin Capital and return backers Fidelity, WuXi Healthcare Ventures, Polaris Partners, Redmile Group, Aisling Capital and Alexandria Venture Investments. www.syros.com
• Shape Security, a Mountain View, Calif.-based cybersecurity startup whose products are designed to stop automated web and mobile app attacks, has raised $25 million in Series D funding. Northern Light Venture Capital, Baseline Ventures and Epic Ventures were joined by return backers like Google Ventures and TomorrowVentures. www.shapesecurity.com
• Ten K Solar Inc., a Minneapolis-based developer of photovoltaic modules for rooftop solar energy, has raised $25 million in new equity funding led by Goldman Sachs. www.tenksolar.com
• Savioke, a Santa Clara, Calif.-based developer of autonomous robots for the services industry, has raised $15 million in Series A funding. Intel Capital led the round, and was joined by EDBI and Northern Light Venture Capital. Seed backers included Morado Venture Partners, AME Cloud Ventures and Google Ventures. www.savioke.com
• mParticle, a New York-based customer data platform “built for mobile,” has raised $15 million in Series A funding. Social Capital led the round, and was joined by return backers Bowery Capital, Eniac Ventures and Golden Ventures. www.mparticle.com
• Tmunity Therapeutics, a Philadelphia-based developer of “products to unleash the immunological potential of T cells to treat a wide range of disease indications,” has raised $10 million in new equity funding from Penn Medicine (academic medical center of the University of Pennsylvania) and Lilly Asia Ventures.
• Scalr, a San Francisco-based enterprise cloud management platform, has raised $7.35 million in Series A funding led by OpenView Venture Partners. www.scalr.com
• Moneybox, a London-based savings and investment app for millennials, has raised $3 million in VC funding from Betfair, Samos Investments and individual investors. www.moneyboxapp.com
• Picwell, a Philadelphia-based predictive recommendation engine for healthcare plan selection, has raised $3 million in new Series A funding from BlueCross BlueShield Venture Partners and the Sandbox Advantage Fund. This brings the round total to $7 million, including a prior close led by MassMutual Ventures. www.picwell.com
• ResiModel, a New York-based platform for aggregating, standardizing and analyzing financial data for multifamily transactions, has raised around $500,000 in new seed funding from Symmetrical Ventures (led by ex-BlackRock CFO Paul Audet). It previously raised $3.5 million from Osage Venture Partners and Leading Edge Ventures. www.resimodel.com
• Threadflip, a San Francisco-based fashion resale marketplace, is ceasing operations after raising over $21 million in VC funding from Norwest Venture Partners, Baseline Ventures, First Round Capital and Shasta Ventures. Read more.
PRIVATE EQUITY DEALS
• Aavid Thermalloy LLC, a Laconia, N.H.-based portfolio company of Audax Group, has acquired Niagara Thermal Products LLC, a Niagara Falls, N.Y.-based provider of thermal management solutions. No financial terms were disclosed. www.niagarathermal.com
• Abraaj Group has agreed to acquire a majority stake in Indian hospital chain Quality Care India Ltd. from Advent International. No financial terms were disclosed. Read more.
• Blue Software, a Des Plaines, Ill.-based portfolio company of Diversis Capital, has acquired Viki Solutions, a Canadian provider of online proofing and real-time collaboration software. No financial terms were disclosed. www.bluesoftware.com
• The Carlyle Group has acquired a majority stake in TestPlant, a London-based maker of software quality tools. No financial terms were disclosed. Sellers include Seraphim Capital. www.testplant.com
• Doctors of Optometric Care, a Norwalk, Conn.-based acquisition platform sponsored by The Riverside Company, has acquired PRIMA Eye Group, an Atlanta-based consulting firm and alliance for nearly 400 independent optometrist practices. No financial terms were disclosed. www.idoc.net
• Greenridge Investment Partners has acquired Consolidated Asset Recovery Systems Inc., a Raleigh, N.C.-based provider repossession and remarketing software and services to lenders. No financial terms were disclosed. www.ez-recovery.com
• Kayne Anderson Energy Fund has committed $150 million in equity funding to form Invictus Energy LLC, a Houston, Texas-based company that will pursue lease and drill opportunities in North America. www.kaynecapital.com
• Plains All American Pipeline LP (NYSE: PAA) said that it has raised $1.5 billion in new financing from a group of private equity firms at a 20% premium to the company’s 20-day volume weighted average share price. The buyers were: EnCap Investments, EnCap Flatrock Midstream, The Energy Minerals Group, Kayne Anderson Capital Advisors and First Reserve. Read more.
• Topspin Partners has acquired Polder Housewares, an Oxford, Conn.-based provider of housewares products in the kitchen storage and prep, home organization, and laundry categories. No financial terms were disclosed. www.polder.com
• Transom Capital Group has acquired HeathCo LLC, a Bowling Green, Ky.-based manufacturer and marketer of door chimes, motion activated lighting and lighting controls, from The Chamberlain Group. No financial terms were disclosed. www.heath-zenith.com
• Vivid Seats Ltd., a Chicago-based secondary ticket marketplace for live events, has raised an undisclosed amount of equity funding from Vista Equity Partners. www.vividseats.com
• Clarification: North Branch Capital has acquired Circuit Check Inc., a Maple Grove, Minn.-based maker of test equipment for electronics and electro-mechanical devices, from Tonka Bay Equity Partners. Our earlier blurb didn’t make it clear that this was an acquisition.
• Ameriquest Inc., a Cherry Hill, N.J.-based provider of business process outsourcing solutions, has set its IPO terms to 6.15 million shares being offered at between $11 and $13 per share. It would have an initial market cap of around $228.5 million, were it to price in the middle of its range. The company plans to trade on the Nasdaq under ticker symbol AMQ, with Raymond James and Stephens serving as lead underwriters. Ameriquest reports $4.2 million of net income on $65 million in revenue for the first nine months of 2015. www.ameriquestcorp.com
• Countryside Properties PLC, a British property developer owned by Oaktree Capital, is preparing for an IPO that could raise around £130 million at a £1 billion valuation, according to Bloomberg. Plans could be formally announced as early as this week. Read more.
• Invesco has acquired Jemstep, a Los Altos, Calif.-based provider of advisor-focused digital solutions. No financial terms were disclosed. Sellers include Caleo Capital. www.jemstep.com
• Amazon (Nasdaq: AMZN) is shutting down Shelfari, a social network for book aficionados that it acquired in 2008. Read more.
• BTG Pactual, a Brazilian bank under pressure since the arrest of its (now former) CEO, said in a regulatory filing that it is in talks to sell its control stakes in insurer Pan Seguros SA and brokerage Pan Corretora SA. Read more.
• China Cosco Holdings of China has made a binding offer to buy a majority stake in the Greek port of Piraeus, which is slated to be privatized. No financial terms were disclosed. Read more.
• Distil Networks Inc., an Arlington, Va.-based provider of bot detection and mitigation, has acquired Boston-based rival ScrapeSentry for an undisclosed amount of cash and stock. Distil has raised around $33 million in VC funding from firms like Bessemer Venture Partners, Foundry Group, TechStars, ff Venture Capital, Idea Fund and Correlation Ventures. Read more.
• Lexmark International Inc. (NYSE: LXK) is considering separate sales of its hardware and software assets, according to Reuters. The Lexington, Ky.-based printing services company has a current market cap of around $1.77 billion. Read more.
• MetLife (NYSE: MET) said that it is considering a spinoff of its retail life insurance and annuity business, via either a sale or an IPO. The company says the move relates to financial pressures created by post-financial crisis regulations. Read more.
• Pitney Bowes Inc. (NYSE: PBI) has acquired Enroute Systems Corp., a Bellevue, Wash.-based provider of supply chain management and SaaS solutions, for an undisclosed amount. www.enroutecorp.com
Pivotal, the EMC and VMWare spinout, has agreed to acquire Slice of Lime, a Boulder, Colo.-based startup that specializes in making web pages, mobile applications, and other products attractive and easily understandable. No financial terms were disclosed. Read more.
• Publicis Groupe (Paris: PUB) is considering a tender offer for a 30% control stake in Samsung Group’s listed advertising unit, Cheil Worldwide, according to Bloomberg. Cheil has a current market cap of around $1.9 billion. Read more.
• Qualcomm (Nasdaq: QCOM) announced and Japan’s TDK Corp. (Tokyo: 6762) announced a $3 billion joint venture to make components for RF chips. Qualcomm will invest $1.2 billion for a 51% stake in the JV, while TDK will contribute a variety of assets (including design, manufacturing and patents). Read more.
FIRMS & FUNDS
• L Catterton is raising upwards of $500 million for its third growth equity fund, according to a regulatory filing. www.catterton.com
• TrueBridge Capital Partners has closed its fourth venture capital fund-of-funds with $400 million in capital commitments. www.truebridgecapital.com
• Wilson Sonsini Goodrich & Rosati, a Silicon Valley-based law firm, said that it will open a Boston office next month (the firm’s 10th U.S. location, and 15th global location). It will be led by partners Lou Lieto (relocating from Washington, D.C.), Mark Fitzgerald (relocating from D.C.) and Mark Solakian (previously general counsel for Joule Unlimited Technologies). www.wsgr.com
Moving In, On & Up
• Chris Cavanagh and Brendan Gibney have joined North Bridge Growth Equity as a principal and vice president, respectively. Cavanagh previously was with Great Hill Partners, while Gibney was with Prospect Partners. In other North Bridge news, the firm has promoted Won Park to principal. www.northbridge.com
• Harvest Partners has promoted Stephen Carlson from principal to managing director. He had joined the private equity firm in 2010 from DLJ Merchant Banking Partners. www.harvestpartners.com
• Faraaz Kamran has joined Twin Brook Capital Partners, the middle-market direct lending subsidiary of Angelo Gordon, as a partner and head of healthcare lending. He previously was a managing director and head of healthcare leveraged finance at Madison Capital Funding. www.angelogordon.com
• Mercato Partners, a lower middle-market growth equity firm, has promoted Alison Wistner to managing director. He has been with the firm since 2010, and serves on the boards of such portfolio companies as Altitude Digital, Alliance Health, Central Logic, Untangle and Venafi. www.mercatopartners.com
• Pritzker Group Private Capital has promoted Adam Milakofsky and Ceron Rhee from vice presidents to principals. Milakofsky has been with the firm for nine years, while Rhee joined in 2014. www.pritzkergroup.com
• Sun Capital Partners has promoted Jonathan Borell to managing director. He joined the private equity firm in 2006, and sits on the boards of such portfolio companies as Vince Holding Corp., The Limited, and Restaurants Unlimited. www.suncappart.com
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