Key Takeaways
- • CalPERS, managing $457 billion in assets, plans to increase venture capital allocations despite a severe downturn in the startup funding market, positioning itself as a "preferred solution provider" as other limited partners withdraw commitments.
- • Venture capital represents only 1% of CalPERS' $55 billion private equity portfolio ($758 million in net asset value), with recent performance severely lagging—CalPERS' VC investments returned −24.8% in the last year compared to −4.7% for its broader PE portfolio.
- • Exit activity for venture-backed companies plummeted approximately 90% in 2022 following a record 2021, as IPO markets froze and venture investing declined 30% year-over-year, according to the National Venture Capital Association.
- • CalPERS has historically underperformed the venture market between 2000 and 2020, notching annual returns of only 0.49%, which Anton Orlich, the fund's managing investment director for private equity, characterized as a "lost decade" that missed extended bull market vintage years.
- • The pension fund is attempting to reverse a strategy that has historically skewed toward public markets and real assets, recognizing that countercyclical deployment during market downturns could capture stronger long-term returns.
Summary
California's $457 billion public pension fund, CalPERS, is signaling an aggressive move to expand venture capital investments despite ongoing turbulence in the startup funding environment. Anton Orlich, the fund's managing investment director for private equity, outlined the strategy in a presentation to CalPERS' investment committee, arguing that the pension fund should capitalize on a period when institutional capital is scarce by positioning itself as a "preferred solution provider" to portfolio companies and fund managers facing a funding vacuum.
The rationale behind this countercyclical approach reflects CalPERS' acknowledgment of sustained underperformance in its venture portfolio. Venture capital currently represents just 1% of the fund's $55 billion private equity allocation, or approximately $758 million in net asset value. Last year, CalPERS' venture investments delivered −24.8% returns, significantly worse than the fund's broader PE portfolio return of −4.7%. Historical analysis compiled by PitchBook reveals that between 2000 and 2020, CalPERS underperformed the venture market substantially, achieving annual returns of only 0.49%—a performance gap Orlich characterized as a "lost decade" during which the fund missed critical vintage years that would have delivered strong investment returns.
The timing of CalPERS' expansion strategy aligns with a severe contraction in venture market activity. Exit activity among venture-backed companies plummeted approximately 90% in 2022 following a record year in 2021, according to the National Venture Capital Association, as IPO markets froze and technology stocks declined sharply. Broader venture investing fell 30% year-over-year, though it remains historically elevated. This sharp pullback has created both a liquidity challenge for startups and an opportunity for large institutional investors with dry powder to deploy capital at potentially more attractive valuations.
CalPERS' historical portfolio construction has emphasized public markets and real assets such as property, limiting its exposure to venture opportunities during prior market cycles. By increasing venture allocations during the current downturn, the fund aims to reverse the structural underperformance that characterized its investment approach over two decades. The strategy represents a deliberate shift toward private markets as a source of alpha generation, betting that disciplined capital deployment in a constrained funding environment will produce superior long-term returns for California's public employee retirement system.
The rationale behind this countercyclical approach reflects CalPERS' acknowledgment of sustained underperformance in its venture portfolio. Venture capital currently represents just 1% of the fund's $55 billion private equity allocation, or approximately $758 million in net asset value. Last year, CalPERS' venture investments delivered −24.8% returns, significantly worse than the fund's broader PE portfolio return of −4.7%. Historical analysis compiled by PitchBook reveals that between 2000 and 2020, CalPERS underperformed the venture market substantially, achieving annual returns of only 0.49%—a performance gap Orlich characterized as a "lost decade" during which the fund missed critical vintage years that would have delivered strong investment returns.
The timing of CalPERS' expansion strategy aligns with a severe contraction in venture market activity. Exit activity among venture-backed companies plummeted approximately 90% in 2022 following a record year in 2021, according to the National Venture Capital Association, as IPO markets froze and technology stocks declined sharply. Broader venture investing fell 30% year-over-year, though it remains historically elevated. This sharp pullback has created both a liquidity challenge for startups and an opportunity for large institutional investors with dry powder to deploy capital at potentially more attractive valuations.
CalPERS' historical portfolio construction has emphasized public markets and real assets such as property, limiting its exposure to venture opportunities during prior market cycles. By increasing venture allocations during the current downturn, the fund aims to reverse the structural underperformance that characterized its investment approach over two decades. The strategy represents a deliberate shift toward private markets as a source of alpha generation, betting that disciplined capital deployment in a constrained funding environment will produce superior long-term returns for California's public employee retirement system.
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