Are Pension Funds the New Venture Capitalists?

by: Susan Mangiero, CFA

According to "Calpers Weighs Expanding Own Hedge-Fund Investments" by Jenny Strasburg and Craig Karmin (Wall Street Journal, April 16, 2009), the giant California pension fund may be the first stop for fledgling hedge fund managers who seek start-up resources. Described as a way to have "more control over its money," incubating hedgies would "mirror an approach the $175 billion pension fund has taken with private-equity managers."

Interestingly, news accounts have Calpers losing a senior investment officer in late January 2008. Credited for helping "CalPERS pioneer many new investments," including hedge funds, Christianna Wood has joined Capital Z Asset Management as CEO. Their website describes Capital Z Asset Management and its affiliates as providing "sponsorship capital to hedge funds and structured products while assuming a meaningful minority interest in their management companies and general partners." Refer to "CalPERS Manager Leaves for Hedge Fund" by Murray Coleman, IndexUniverse.com, January 29, 2008.)

The role of CalPERS and other potential "angels" raises a host of interesting questions, some of which follow:

  • Will large retirement plan incubators displace high net worth investors?
  • Will large retirement plan incubators displace fund of funds and/or pension consultants?
  • How will pension fiduciaries properly discharge their oversight duties if they are taking management positions in hedge funds that in turn receive plan assets? (Recall that CalPERS acquired a 9.9% ownership stake in Silver Lake Partners, a private equity firm that invests in technology and technology-enabled companies. CalPERS has a seat on Silver Lake's Advisory Board as a result. If CalPERS is allocating monies to Silver Lake Partners, has their due diligence process changed? See "Silver Lake Announces Long-Term Strategic Partnership with CalPERS," January 9, 2008, Reuters.com).
  • Might venture capital firms be adversely impacted if pensions decide on a "do it yourself approach instead of plunking down money with Silicon Alley or Valley or international equivalents? (Dan Primack, editor of PEHub.com, aggregates national and regional venture capital data. See "Q1 VC Numbers: Oh, The Horror," April 18, 2009).

As the capital markets reconfigure, there are opportunities aplenty for everyone. Will the economic crisis beget a brave new world wherein retirement plan assets are used to grow small companies? Who will win? Who will lose? Interesting food for thought.