CalPERS Rescinds $700 Million Investment With Private Equity Fund Headed By Doctor With No Private Equity Experience

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.

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  1. Ben Johannson

    The real question here is, what fool running a public pension system would believe a promise of consistent 20% returns?

    1. ptup

      Oh, there’s a ship of fools out there just ready to believe. Hey, they tell us that the pension funds will see returns of 8% into infinity. If only I could sit back and watch 8%, until my last breath.

  2. diptherio

    The only investor?!? Did CalPERS think this fund was so exclusive that no one but them was able to get in, or what? Sole investor seems like a red flag to me.

    1. phichibe

      Absolute concurrence. My experience is not w/ PE but rather VCs, but the only VCs w/ one LP are either captive houses that are arms of big corporations (eg, Google, etc) or are very small (<$100 M). I think this guy was absolutely promising CalPERS that he could deliver SAC type returns because he had SAC-type insider information. I'd love to see the CalPERS deal memos that went around the senior officers before they made their investment. I'll bet at least one contains an admission that this was the case – at which point CalPERS would be on the hook for investing in a criminal conspiracy. Sadly, given the "inmates are running the asylum" state of law enforcement – white collar division – I doubt any DA would pursue the case. What a rotten system.


  3. blockhead

    Great big thanks to you, Yves. This story wouldn’t even be out there if it weren’t for all of your efforts. if there’s ever going to be a meet up in the Midwest, I’ll buy your first drink.

  4. craazyman

    doctor doctor gimme the news
    “you got a bad case of money blews”
    ain’t no shills gonna cure my ills
    I gotta / bad case / of muh-uhh-ney blewwwwwz

  5. steelhead23

    “What sexual favors were exchanged for these deals to be signed?”

    Gee, I thought this was all about kickbacks and backscratching. There’s sex involved too? Next you’ll tell me there’s coke and Quaaludes involved as well. Paging Mr. Belfort, Mr. Jordan Belfort…

    It seems that folks eyes glaze over when bribery, graft, and malfeasance are at issue, but bring a little illicit sex into the story and everyone grows donkey-ears. So, if you really want to blow CalPers up, don’t waste your time digging through mundane financial reports, find the hooker’s phone number.

    Sorry, I couldn’t help myself.

    1. hunkerdown

      There’s an interesting tangent. How many sex workers inside the Beltway have clearances?

  6. susan the other

    8%. On an investment fund with only one investor, that being CalPERS. And they have invested either 700 million or over 5 billion (not sure here). Crony capitalism at its worst. So illegal it stinks. I’d rather have state capitalism, aka socialism, any day. Wouldn’t you? I’m pretty sure CalPERS is only the most glaring example of this practice and all pension investments are corrupted. It’s just that Idaho’s is so piddling nobody will ever care. In order to have a country, you really do need laws and regulations. And then you need to enforce them.

  7. Jacob

    “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.”

    According to the NORC scores of occupational prestige, M.D. has the highest score, which means that most people have greater reverence and respect for physicians than for people in other professions. Interestingly, financial professionals such as bankers and brokers, are among the lowest-prestige occupations in this ranking, but someone who specializes in financial matters would’ve been a more appropriate choice to run the investment fund. It’s very likely that CALPERS officials were impressed with the doctor’s high-status title and his association with the Bush presidency, neither of which justified employing him to run an investment fund. This, in turn, probably indicates that the CALPERS board that selects investment managers is incompetent.

  8. RUKidding

    As a CA public servant “invested” in CalPers, I thank you Yves for continuing to highlight the stupidity and cupidity of CalPers investment practices and board. It makes me want to scream. Periodically some of this sort of real news gets out in the public sphere, mostly in Sacramento’s alternative weekly called “Sacramento News & Review,” but mostly it’s just “mum’s the word.”

    Marcy Wheeler’s been following the “fortunes” of Keith Alexander’s most excellent CyberJerk revolving door “career” adventure post NSA. Seems Alexander is just following in David Brailer’s footsteps. How to rip off the rubes for fun & profit using your prior “brilliant District of Criminals career” as your stepping stone to anything and everything, even if you’re completely unqualified and a know-nothing doofus. The Q is: who got Brailer involved in this scheme? Surely he didn’t dream it up himself? Who else is skimming off the top of this sweet little old GRIFT?

  9. ltr

    Look at the Vanguard Health Care Fund these last 5 years and understand how awful the returns on the Brailer funds were. I am shocked.

  10. sharonsj

    Sexual favors are de rigeuer. Bribery is still the main requirement (or at least unusually large fees).

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