I vote against the current private equity proposal, soon on the docket, when CalPERS’ newly announced Chief Investment Officer, Ben Meng, “stuck” in China pending the release of a non-compete agreement, formally joins the team.
My dissent
I vote against the proposal because, for one, it deploys more downstream suboptimizations of the macroeconomic confounding of risk and distribution in asset management, and does not at all employ a new normalization of truth in asset management to warrant a diversion from CalPERS’ main private equity vehicle.
Second, the returns produced by private equity are mostly derived from pump-and-dump schemes of valuations, not quite the same as producing socioeconomic value the world aught to care about, and CalPERS members will actually suffer from.
Given my history in identifying and building startup ideas that grew to 100M+ valuations, you may think I would just applaud to hear CalPERS in its public board-meeting session report on the creation of a new $10B vehicle to grow the private equity allocation, which includes venture capital, of its total $349B funds under management.
But I don’t.
Undue complexity
For more money as the arbiter of innovation, deployed to what humanity wants, not correlated to what humanity needs, innocently intended to strengthen the renewal of humanity, weakens humanity at twice the investment pace. Furthermore, the 1.9 million members of CalPERS deserve a better master plan to which all asset allocation strategies must conform. A plan in sync with evolutionary guidelines that continually serves the evolving 360-degree interests of its members.
CalPERS is in desperate need of such a new master plan, not in the least to resolve its 1/3 unfunded liability. The latter, the result of the musical chair game of asset management running out of viable chairs to sit on when the music from the winds of economic volatility stops howling.
Now, I understand why investment manager John Cole and his 16 member team are eager to come up with new structures to improve CalPERS’ influence on the economic expansion of California and beyond. Private equity, as I explain in another post, is crucial to the expansion of the fractal of humanity, and even more pertinent, crucial to raising the investment returns above the 7% benchmark every pension fund in the land is currently stuck with.
Of course, this $10B vehicle will not produce meaningful outlier returns to the total fund, even when it outperforms. Nor is it expected to produce baseline private equity returns, as the investment hold is significantly longer and by virtue of its mechanics, the investment thesis is more conservative. Many other factors invalidate the potential of this proposed program, some of which I have written about in the past, and much of it related to how the rubber meets the road in private equity, the nature of the asset.
A vital asset
A strong allocation to private equity is required for the renewal of the aging distributions in asset management, as well. And private equity, including venture capital, is responsible for spawning the renewal of public equities. Which then spawns the growth of many other asset classes. So, a well-placed allocation to private equity is crucial to the growth of the asset management business in general.
All the more reason to establish a master plan in which the lifecycle of asset class allocation is paired with the evolutionary expansion of humanity. And yet, not a single pension fund deploys such a plan today. The very reason why pension funds grow at such a tepid pace, merely regurgitating endless downstream optimizations of an existing norm, and steadily running out of options to escape to.
New order
So, I evaluate the new private equity proposal of CalPERS as an enthusiastic attempt of the mice at play when the cat’s away. A plan that lacks correlation to a higher normalization of evolutionary truth that will spawn investment returns across asset classes in conjunction with the guaranteed expansion of humanity.
I suggested in a call to a CalPERS board member to wait until Ben Meng is on board and then to revisit not the allocation and performance of individual asset classes in isolation, but to – for the first time – realign the total fund to let the cause of human evolution determine the consequence of asset allocations and distributions. Not as is customary today, the other way around.
