Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

If the reach for lower fees compromises returns, is it worth it? That's a question Calpers should consider. 

As Bloomberg News reported late Thursday, the California Public Employees’ Retirement System is in discussions with BlackRock Inc. about managing some or all of its $26.2 billion in private equity investments. It's still unclear how any arrangement would be structured, but BlackRock's management of with Swiss Re's private equity assets suggests Calpers's platform could be managed by the investment firm's fund-of-funds group.

Such a move would result in lower fees for the biggest U.S. pension fund -- but returns may be more mediocre than if Calpers continued to manage its private equity investments in-house. That's because the fund would essentially be paying two layers of management and performance fees. 

Save on Fees But Sacrifice Returns?
Calpers is considering outsourcing its private equity investment function. While it's unclear what form that could take, its returns may well take a haircut.
Source: Preqin

It would also stand in stark contrast to the goings-on at other pension funds. Most recently, the Oregon Investment Council found that by investing through third parties, the Oregon Public Employees Retirement Fund was at a strategic disadvantage in deal sourcing. As such, it both reduced its exposure to fund-of-funds managers such as Fisher Lynch Capital and obtained approval to bolster its internal team

The median fund-of-funds return is lower than the return Calpers has achieved from in-house management of its private equity program
Source: Preqin
*Other Private Equity includes Balanced, Co-Investment, Co-Investment Multi-Manager, Direct Secondaries and Turnaround funds

Beyond the issue of returns, it would be strange for Calpers to outsource this way using an arrangement like this. Fund of funds are traditionally relied upon by small pension funds and endowments that have limited experience or expertise, not by investors with the size and track record of Calpers, which already has access to the best-performing funds. 

I've previously suggested that Calpers and its peers should approach private equity investing in the same way as their Canadian counterparts -- through direct investments. Even if it means paying up for talent that's adept at this type of dealmaking, it's a way to minimize fees and maximize returns.

Calpers Chief Investment Officer Ted Eliopoulos seems interested in this idea: At a panel in July, he recommended that the fund should improve its capability to make long-term acquisitions and suggested a Calpers-controlled entity that could hire investment staff at a pay rate much more commensurate with what they'd earn at a private equity firm. 

It's early days yet, and I'm sure the board is considering all its alternatives. But if returns are prioritized above fees, as they should be, then outsourcing may not be the best way forward. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. One quirk is that in that situation, BlackRock also purchased Swiss Re's private equity arm -- I can't imagine that will happen here.

  2. It's been able to generate a net internal rate of return of 10.7 percent

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Gillian Tan in New York at

To contact the editor responsible for this story:
Beth Williams at