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CalPERS picks infrastructure adviser

The board of the $336 billion California Public Employees Retirement System (CalPERS) has voted against the recommendation of the fund’s investment office in choosing a new infrastructure consultant.

The investment team had recommended the board select its real-estate consultant, Pension Consulting Alliance (PCA), as infrastructure consultant as well, to better align advice across CalPERS’ real-assets program. Instead, the board voted 9-2, with two directors absent, in favour of appointing Meketa Investment Group, which was runner-up to StepStone in the request for proposal (RFP) for a board infrastructure consultant issued in April 2014. StepStone was appointed in September that year but has elected to resign.

Board member Richard Gillihan said Meketa achieved the second-highest score in the 2014 RFP and “that should matter”. PCA was not involved in that RFP.

“If scoring mattered then, it matters now,” Gillihan said. Meketa is the board’s private-equity consultant.

The investment office also recommended taking the opportunity created by StepStone’s resignation to align the end dates of the infrastructure and real-estate consultants; instead, the board voted 8-3 in favour of retaining the original end date of the infrastructure contract.

The decision means the CalPERS’ board will receive advice on the fund’s $35.8 billion (as at May 31, 2017) real-assets program from three separate consulting firms appointed for three different terms: Meketa on infrastructure, ending February 29, 2020; Wilshire Associates on forestland, ending June 30, 2020; and PCA on real estate, ending March 31, 2022.

The board did accept the investment team’s recommendation not to issue a new RFP to find a replacement for StepStone, and to appoint either PCA or Meketa.

Head of compliance and operational risk for the CalPERS investment office, Kit Crocker, told the board the investment team recommended against an RFP “because of the immediate need for a replacement to maintain continuity and to avoid a lapse in these critical services”.

Push to reduce complexity

“Secondarily, though, please be aware [that] of the available options, only Meketa and PCA have the resources, experience and infrastructure expertise to assume this important role immediately without a lapse in service,” Crocker advised.

In arguing for aligning the consultants’ end dates, she said it would “significantly improve the overall efficiency of the board consultant RFP process, by reducing complexity and saving both board and staff time. This is consistent with our current Lean Six Sigma [business improvement] initiative across the enterprise.”

CalPERS’ chief operating investment officer, Wylie Tollette, told the board the investment office would be “happy to work with whichever consultant you pick”, but added that part of the logic for consolidating the infrastructure and real-estate consulting roles was that it “mimics and mirrors the consolidation of our real-assets program”.

“Historically, [real assets] was regarded and managed and treated as three separate programs: forestland, infrastructure and real estate,” Tollette said. “You may recall that over the last several years…we’ve consolidated that into one real-assets program.

“Earlier this year, we decided to move towards one real-assets benchmark, and the idea of having one consultant in alignment with that asset class certainly makes some logical sense from a process and staff perspective.”

StepStone’s departure

StepStone advised CalPERS on August 11 that it intended to step down as board infrastructure consultant on September 30. It gave no reasons in its resignation letter.

In the first public disclosure of the board’s assessment of consultant performance, released last month, StepStone was rated poorly on its ability to recommend ways to reduce or control costs, on helping the board define appropriate risk parameters and identify risk mitigation strategies, and on proactively identifying new investment opportunities and bringing them to the board’s attention.

It was rated highly for acting with honesty and integrity, and on making clear and relevant recommendations to the board on investment policies and guidelines.