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Growing Pension Fund Stakes Feed PE Search for 'Permanent Money'

CalPERS, the California Public Employees' Retirement System, has taken its third direct ownership stake in a private equity firm by spending an estimated USD 275 million to acquire 10% of Silver Lake Group, a US-based fund specializing in technology buyouts.

Silver Lake manages some USD 16 billion in assets through its various funds. CalPERS ownership share brings with it a seat on the fund's board and a commitment to invest even more in Silver Lake fundraising. CalPERS has already put USD 400 million into the firm's latest buyout fund - a three-fold increase over its 2004 contribution to the previous fund.

With over USD 250 billion in assets, CalPERS is the largest US public employees pension fund. CalPERS latest direct investment follows the earlier purchases of a 10% stake in Apollo Management and a 5% stake in Carlyle.

Since 1990, CalPERS has invested over USD 40 billion in over 400 private equity funds and (like many other large pension funds) has been rapidly increasing its allocation, recently announcing that it would raise the percentage of overall pe investment in its portfolio from 6 to 10%. The pension funds' pe investments can be viewed at CalPERS online Alternative Investment Management Fund Performance Review, which CalPERS claims has brought in USD 11.8 billion in profits since 1990. Legal action in 2004 forced CalPERS to make publicly available the management fees paid and profits generated from its pe investments.

Buying direct stakes in the firms is part of CalPERS' strategy of paring back the number of investments in individual funds while increasing the overall share allocated to "alternative assets", including buyout funds. Direct ownership also saves on fees. As one financial analyst told the Wall Street Journal, "Getting a piece of management is smart because you get part of your fees back and a piece of everyone else's fees." Research has demonstrated that pe funds in fact make more - much more - on various management fees than they do on "carried interest", the percentage of the profit resulting from the sale of the company and/or dividends. (See New Wharton Study Shows the Measure of the Buyout Fee Racket on this site).

For the funds, it provides a needed source of "permanent money" at a time when public offerings have flopped. According to Silver Lake, "The CalPERS investment and strategic partnership with us provide tremendous benefit to Silver Lake and our limited partners by bringing important long-term funding."

The other key source of "permanent money" has been the state investment funds (or "sovereign wealth funds"). CalPERS' 10% stake in Apollo was matched by a 10% stake sold to the Abu Dhabi Investment Authority. Another Abu Dhabi state investment arm, Mubadala, has taken a 7.5% stake in Carlyle.