CalPERS to Put Funds in Underserved Areas

The board of the California Public Employees’ Retirement System has approved a pioneering $475-million initiative to channel investments into underserved urban and rural markets statewide.

Called the California Initiative, the effort places the nation’s largest public pension fund at the forefront of a movement to seek market returns from investments in low-income communities that have long been overlooked by institutional capital.

The initiative was spearheaded by state Treasurer Phil Angelides, who has promoted the cause to other public and private pension funds as offering a dual economic and social return.

“We think this can be a real catalyst to bring more capital into these underserved markets,” CalPERS spokeswoman Pat Macht said. “By being first there, we can be a real change agent.”

Institutional investors have historically steered clear of poor urban areas because of high perceived risk and lack of data on the market. But Macht said CalPERS’ staff--which honed the initiative over the course of a year--believes it found a way to spur economic development in overlooked pockets while promising public employees a strong rate of return.

“We’ve taken the uncertainty out by investing with only [those] companies that already have a proven track record,” she said.

California’s public employees are increasingly members of minority groups, but their pension fund investments have not traditionally gone into the neighborhoods where many live and work. Over the last two years, a growing number of policymakers from Angelides to former President Clinton have drawn attention to those so-called domestic emerging markets, arguing that they pose lower risks than many of the pension funds’ overseas investments.

Other investors who focus on low-income minority urban neighborhoods applauded the effort and said it could help trigger a crucial shift in thinking among conservative institutional investors.

“We think it’s a fabulous confirmation of . . . the underlying fundamentals of urban investment, whether in real estate or small emerging companies,” said K. Robert Turner, managing partner of Beverly Hills-based Canyon Capital Advisors. “It’s not a charitable or social thesis but a business thesis based on economics and demographics. . . . We only wish that more major state pension funds will follow the lead.”

Canyon Capital is raising its own $300-million urban investment fund in a partnership with Magic Johnson Development Corp. It did not seek CalPERS funds because Canyon Capital’s scope is nationwide, Turner said.

CalPERS staff had received 67 proposals from investment funds and companies across the state, selecting a dozen of those to get the money into underserved communities.

The board approved 11 of those Monday, holding off on the 12th--Los Angeles-based Blue Market Capital Partners Fund II. Blue Market is managed by former partners of McKinsey & Co., the consulting company that has been advising CalPERS on its California investments, and CalPERS wants to ensure that there is no conflict of interest in awarding it investment capital, another CalPERS spokesman said.

Los Angeles-based Yucaipa Cos., founded by supermarket magnate Ron Burkle, was the largest recipient, with $200 million going to its Yucaipa Corporate Initiative Fund. That money will go to help major supermarket and other national retail chains expand into underserved communities, Macht said.

“Our plan is to work with Fortune 1,000 companies to bring investments to . . . urban and rural areas that for whatever reason haven’t seen the boom that other parts of the country have,” Yucaipa spokesman Ari Swiller said. “We want to do that and at the same time provide a great return for CalPERS.”

Burkle has established his credentials in the field over the last dozen years, bringing the Ralphs and Food 4 Less supermarket chains, which he then owned, to low-income neighborhoods throughout the region while working closely with labor leaders.

The selections aim to spread out risk, Macht said, with Yucaipa representing the safest bet as it deals with major national corporations. Other selected firms--which received between $10 million and $50 million each--are focusing on seed, middle-market private equity and expansion capital for companies in underserved urban or rural areas.

The initiative is statewide but focuses mainly on Los Angeles, the San Francisco Bay Area and the Central Valley.

At the higher end of the risk scale are new funds created specifically for the initiative. Los Angeles-based Nogales Partners’ California Embarcadero Fund, for example, will focus in part on Latin American companies expanding into heavily Latino communities here.

CalPERS also tapped its existing partners for the initiative. Among those are Los Angeles-based Levine Leichtman California Growth Partners and Silicon Valley-based Draper Fisher Jurvetson Central.

The partners’ existing funds have brought in rates of return ranging from 15% to 218%, and a number have a track record in underserved markets, CalPERS documents show. Macht said the California Initiative is aiming for overall rates of return between 15% and 20%.

The board approval brings to more than $1 billion the amount CalPERS has directed to so-called underserved markets in the last year alone.

Macht said the pension fund believes the California Initiative has “a strong chance of success” because previously overlooked urban and rural markets offer large and often cheaper labor pools, affordable real estate, high consumer density and higher aggregate income per square foot.

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Funding for the ‘California Initiative’

The California Public Employees’ Retirement System selected 11 investment firms this week as partners, providing them pension-fund capital to spark business development in areas that generally have been ignored by venture capitalists.

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Partner Amount (in millions) Yucaipa $200 Bank of America 50 Leonard Green & Partners 50 Levine Leichtman Capital Partners 50 Nogales Partners 25 Opportunity Capital Partners 25 Provender Capital Group 25 Draper Fisher Jurvetson 20 American River Ventures 10 Garage 10 Silicon Valley Community Ventures 10

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Source: CalPERS