CalSTRS private equity chief retires

Réal Desrochers has ended his 11-year reign as the director of alternative investments at the US' second largest public pension, leaving veteran portfolio managers Margot Wirth and Seth Hall as interim co-directors. Desrochers did not disclose future professional plans in a farewell email sent to friends and colleagues.

The head of private equity for the $119 billion California State Teachers' Retirement System, Réal Desrochers, has retired.

Two of the pension's four alternative investments portfolio managers, Margot Wirth and Seth Hall, have been named interim co-directors until CalSTRS finds a permanent replacement, a spokeswoman confirmed. Hall joined the US public pension in 1999, while Wirth was hired in 2000. Executive search firm Korn/Ferry will conduct a global search for a new head of private equity.

I'm not sure Réal will ever truly retire, he has investments in his blood.

Christopher Ailman

An email Desrochers sent to colleagues noted he would retire from “State service” and return briefly to his native Canada to enjoy the start of spring with his wife, but gave no indication of future professional plans.

“I'm not sure Réal will ever truly retire, he has investments in his blood,” Christopher Ailman, CalSTRS' chief investment officer, wrote in an internal email announcing Desrochers' departure.

Desrochers declined to comment.

Last Tuesday marked his last day with the influential institution, whose robust private equity programme has been led by Desrochers since 1998. Prior to that he spent 11 years steering the international private equity programme for Canadian pension La Caisse de dépôt et placement du Québec.

Réal Desrochers

“He is truly a global industry leader in private equity,” Ailman wrote in the email. “During his tenure, our private equity portfolio has produced the second highest performance in the entire US, better than endowments, public pensions, and corporate [pensions]. We will miss Réal, he leaves very big shoes to fill behind him.”

Private equity progression

As of the end of March 2008, the pension's private equity programme has averaged a 19.1 percent return since its launch in 1989. For the last fiscal year on record, ended 30 June 2008, the private equity programme was one of the only three asset classes to give the pension positive returns amid what CalSTRS termed “a troubled market”. The private equity programme beat its 4.9 percent benchmark with an 11.6 percent growth. The preceding two fiscal years, private equity returned 27.6 percent and 32 percent, respectively.

“If we didn't cap the allocation to alternative assets, the whole fund would be invested in there because of the returns,” Desrochers told sister magazine Private Equity International in an August 2007 interview.

Like many US pensions in the past decade, CalSTRS has significantly expanded its private equity programme. Under Desrochers' watch, the programme moved beyond making investments solely in North America to become a global investor. Other noteworthy policy changes have included adding the ability to both buy and sell fund interests on the secondary market; to co-invest globally; and to purchase minority stakes in private equity firms' management companies.

CalSTRS' target allocation to private equity has grown from around 2.3 percent in 1998 to a 9 percent “goal” in 2006.

If we didn't cap the allocation to alternative assets, the whole fund would be invested in there because of the returns.

Réal Desrochers


While for the past several years its strategy has been to over-weight its alternatives target within an acceptable range, in September 2008 the pension surpassed its 11 percent upper range limit, with 12 percent of the portfolio comprised of private equity assets. Exceeding its upper limit was a result of shrinking values in other asset classes like public equities coupled with slowed private equity distributions. To combat this so-called denominator effect, CalSTRS in November amended its acceptable private equity allocation range to between 3 percent and 15 percent.

Schematic challenges

The denominator effect is plaguing many public pensions, as are state budgetary issues and high profile departures.

Joseph Dear recently resigned as director of the Washington State Investment Board to fill the CIO role vacated by Russell Read at the California State Employees' Retirement System. Read, like his predecessor Mark Anson, left the pension to pursue private sector investment – a common occurrence among longtime public sector investors.

During a conference panel in Los Angeles in April 2008, Ailman, Dear and Robert Kleine, Michigan's treasurer, discussed the challenges of running sophisticated alternative investment platforms beneath government umbrellas.

Ailman said US state pensions should follow the example of US universities, endowments or particularly Canadian pensions, which “have all spun off their investment arms as a crown corporation and then own them and profit from them”.

Dear and Kleine outlined challenges to running pension schemes based on models created in the 1970s and 1980s.

“How do you attract top investment talent with civil service wages?” asked Kleine. He noted the State of Michigan Retirement Systems' private equity head resigned in 2007 to take a position with the University of California for nearly quintuple the salary.

“These salaries have to go up,” agreed Dear, “but you've got to be realistic – public plans are never going to pay private sector wages.”

Dear said the WSIB depended on recruiting people who find satisfaction in creating wealth for teachers and firefighters, but added he did go to the legislature to lobby for pay rises. “I had sort of two pitches,” he said. “One was 'Beat Oregon!' because they had poached one of our staff. And the other was 'Well, you know, the CIO should at least make as much as the football coach.'”