Explaining Southern California's economy

CalPERS strikes fear in the hearts of private equity firms

Max Whittaker/Getty Images

A sign stands in front of California Public Employees' Retirement System building in Sacramento.

Yesterday, CalPERS, the huge California public employees pension fund, announced some good news: the $248 billion colossus made a 13.26 percent return on its investments in calendar year 2012. They're dancing with their spread sheets in Sacramento, because that's a vast improvement over the 2012 fiscal year performance, which ended on June 30.

How bad was the fiscal year performance? One percent.

Yep, one percent. It was bad.

CalPERS has targeted a rate of return for its investments of 7.5 percent — a target that it reduced from 7.75 percent last year. So that 13.26 percent return, if it holds up through the fiscal year, will go a long way toward helping CalPERS make up what it lost last year.

However, as CalPERS Chief Investment Officer John Dear pointed out and Pensions & Investments reported, that 13.26 percent wasn't as thrilling as it sounds. It was "117 basis points below the retirement system's custom benchmark for the calendar year."

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How big should venture capital be? Try less than $25 billion

Vincent Mallet

AFP/AFP/Getty Images

A Palo Alto startup. You can still get funding, but if you don't succeed rapidly after early stage investment, you could be in trouble.

Earlier this week, the National Venture Capital Association and Thompson Reuters assessed the current state of the VC fundraising landscape. The verdict is that VC has "settled in a 'new normal,'" with the total number of funds decreasing while the total amount of money raised went up in 2012.

That performance lived up to expectations from earlier this year.

The total raised was $20.6 billion, which the NVCA suggests is the "Goldilocks" number: Not too big, not too small — but just right. There's a sense in the VC world that it's critical to keep the total amount of money raised under $25 billion.

That much money flowing into VC on an annual basis means that entrepreneurship and innovation can be funded in an optimal manner, without too many bad companies and bad ideas getting money, just because VCs need to put their funds to work.

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Why was CalSTRS investing in gun company linked to Newtown massacre?

California State Teachers Retirement System

CalSTRS

The headquarters of the California State Teachers Retirement System in Sacramento. Like many big pension funds, it's increasingly invested in a riskier manner to meet return targets. This led to its investment with Cerberus Capital Management and the gunmaker that built the weapon used in the Newtown massacre.

Just to lay it out for you:

• Adam Lanza, a disturbed young man, killed 20 children, his mother, and six other adults in Newtown, Connecticut on Friday before killing himself

• He used a "Bushmaster" automatic rifle, a civilian variation of the AR-15, a military rifle that traces its heritage to the M-16

• The company that owns Bushmaster, Freedom Group, is owned by Cerberus Capital Management, a prominent private equity fund that...

• Raised at least $500 million from the California State Teachers' Retirement System (CalSTRS) for a fund that invested in Freedom Group.

It's one of those gruesome loops – the serpent eating its own tail – that can only result from the intersection of private-equity, the huge pension funds that provide private-equity with money, and the imperative for funds like CalSTRS to hit their annual return targets.

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CalPERS just struck fear in the hearts of venture capitalists everywhere

Max Whittaker/Getty Images

The California Public Employees' Retirement System in Sacramento, California. The fund may severely cut back its venture capital investments.

CalPERS, the gigantic California public workers' pension fund, has announced that it's going to to review the venture-capital component of alternative investments in its $230-billion overall portfolio. This follows on the heels of a much-discussed paper put out by the Kauffman Foundation earlier this year, in which the organization — which is devoted to promoting entrepreneurship — revealed that its VC investments has seriously underperformed in the past decade.

I wrote a feature about this in May. In January, CalPERS announced that it made only a 1.1-percent return on its investments, missing its target return of 7.75 percent by a wide margin. One of the reasons it in alternative asset classes like VC in the first place is that it can't meet its return objectives otherwise.

The fundraising aspect of being a VC has gotten pretty challenging. Some VCs seem to be adapting to this "new normal," while others appear content to live at the top of the pile and uses their brand-name status to vacuum up most of the available money. But they all rely on large funds like CalPERS to fuel their efforts to find the next Google or Facebook.

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DeBord Report Live: Felix Salmon edition

A sign announcing Facebook IPO is flashe

EMMANUEL DUNAND/AFP/Getty Images

The Facebook IPO announced on the NASDAQ stock exchange. Did it's inability to live up to the hype doom the IPO revival?

We welcomed Reuters finance blogger — and recent Loeb Award winner — Felix Salmon to the Crawford Family Forum last Thursday to talk IPOs, as part of my "DeBord Report Live" series. Specifically, whether the IPO is D-E-A-D. Felix has lately been making a very strong case against the traditional IPO, in Wired and elsewhere. He's outlined an alternative model, of sorts. So we got to engage in some lively conversation on the topic, and we enjoyed some excellent contributions and questions from the audience.

We also got more mileage out of the three terrible slides I grabbed to contribute to the conversation than I ever thought possible.

An interesting product of the evening's discussion was our kind of shared realization that the business of Silicon Valley (broadly defined, but basically the Bay Area tech scene) isn't necessarily the creation of new companies — it's the creation of venture capitalists. 

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