You cannot make stuff like this up. The giant public pension fund CalPERS didn’t just make a “what were they smoking” private equity investment. The turkey deal was also stunningly large.
As Pension360 writes (emphasis theirs):
You probably trust your doctor with your life. But with your money? Many people might balk at the notion of their doctor making their investment decisions for them.
But back in 2007, CalPERS made a big bet: a $705 million investment in a private equity fund, Health Evolution Partners Inc., specializing in health care companies.
The CEO of the fund, David Brailer, is a nationally renowned physician who had previously been the “health czar” under George W. Bush. But this was his first foray into the investment space, and he had no experience running an investment fund or making private equity investments.
Still, he reportedly promised the CalPERS board healthy returns in excess of 20 percent.
But through seven years, the fund has never managed to exceed single-digit returns. And portions of CalPERS’ investment have actually experienced negative returns.
That has led CalPERS to cut ties with the fund, according to Pensions & Investments:
CalPERS is ending its unique experiment as the sole limited partner of Health Evolution Partners Inc., a private equity firm that focuses on health-care companies.
CalPERS data show the HEP Growth Fund had an internal rate of return of 6.5% from its inception in mid-2009 through Dec. 31, 2013. By contrast, the $5.3 billion growth fund portion of CalPERS’ private equity portfolio returned 12.72% for the five years ended Dec. 31, the closest comparison that could be made with the data the pension fund made available.
The HEP fund of funds has had more serious performance problems. Its IRR from inception in 2007 through Dec. 31, 2013 was -5.2%, show CalPERS statistics. CalPERS also wants out of that investment, but sources say a complicated fund-of-fund structure may make that difficult.
Mr. Desrochers would not comment on HEP, telling a Pensions & Investments reporter the matter was too sensitive to discuss.
CalPERS spokesman Joe DeAnda, in an e-mail, said, “We continue to evaluate all options relating to Health Evolution Partners.”
Mr. Brailer did not return several phone calls.
CalPERS paid the fund over $18 million in fees in the fiscal year 2011-12, according to the System’s financial report.
What sexual favors were exchanged for these deals to be signed? This is a large commitment for any fund, even for one the size of CalPERS, and an insanely large one for a fund run by someone with no investment track record.
One can see the logic, such as it was: a supposedly super connected industry insider would have advantaged access to transactions and/or be able to get better intelligence about them, leading to more informed decisions and hence better returns. But someone like Brailer would need to have a very solid team of private equity investment pros supporting him. And even then, you’d also want to know the deal among the top members of the team, since a newbie CEO would be particularly vulnerable to the exit of key personnel. (Note that PE funds normally don’t divulge that information, but CalPERS’ status as sole funder of this venture would give it the needed leverage). And on top of that, as the article makes clear, the fund of fund idea was even more dodgy,* due to lack of experience in evaluating funds as well as the difficulty of unwinding the structure.
The reason for belaboring this particular bad deal is that CalPERS is widely seen as savviest public pension fund investing in private equity. Yet there’s no justification for this self-inflicted wound. A much smaller investment could have been justified as an interesting experiment. Brailer’s past prominent role leads one to suspect that there’s more to this story than the press has ferreted out. And if CalPERS can get itself in a costly mess like this, imagine what lurks at other public pension funds.
* CalPERS has a number of fund of funds, but it typically does not pay a second layer of fees on them.