CalPERS losses no threat

"Huge losses at CalPERS," screamed headlines in some economic papers this week. The papers added that California Public Employees' Retirement System (CalPERS) has written off $50 billion since January because of reduced value of assets pummeled by the financial crisis. The papers also hinted that venture capitalists had reason to worry about these losses.

CalPERS is one of the largest investors in Israeli venture capital funds. It has invested $130 million to date in them: $70 million in six funds ( Apax Partners, Carmel Ventures, Gemini Israel Funds, Israel Seed Partners, Jerusalem Venture Partners (JVP), and Pitango Venture Capital) through "gatekeeper" Grove Street Advisors; and $60 million directly in Giza Venture Capital and Markstone Capital Partners Group LLC ($50 million). What happens if the tap is closed?

With all due respect to the fear-mongering headlines, back in December 2007, long before CalPERS reported heavy losses, it announced a new investment policy for its $250 billion in assets under management. This figure has since shrunk to $190 billion.

CalPERS announced that, under its new investment policy, it will increase its investment in private equity, including venture capital, from 6% of assets to 10%. At the same time, it reduced its equity allocations from 60% of all investment to 56%. Changes were also made in allocations to real estate and other sectors in which CalPERS invests.

As for the "big write-off", although CalPERS's CEO and investment manager have resigned over the losses, it has made no announcement about any changes in its investment policy or about any reductions in allocations, or that it might not meet its commitments.

Although CalPERS has suffered a 20% write-off since January, it posted record double-digit annual returns in the preceding four years. It turns out that it was prescient, and set aside 14% of its profits for hard times.

To sum up, the economic crisis will naturally affect the high-tech and venture capital industries, but there is no need to panic and conclude that every loss reported by a large institutional investor sounds the death knell for Israel venture capital. There is enough bad news nowadays without inventing more.

Published by Globes [online], Israel business news - www.globes-online.com - on October 30, 2008