CalSTRS sticks with emerging VC funds, bucking an industry trend

The California State Teachers' Retirement System is bucking a trend whereby many of its peers are consolidating private fund portfolios around a small number of big brands.

Driving the news: CalSTRS has decided to maintain its 21-year-old emerging managers program, which covers a new firm's first three funds, even though longtime overseer Invesco has decided to move on.

• The new manager is Sapphire Partners, which will maintain the program's $1.4 billion in assets and immediately have more than $80 million available for additional commitments. The program is expected to be re-re-upped, although that would still require CalSTRS board approval.
• One big change is that Sapphire will focus exclusively on early-stage venture capital managers, whereas the Invesco-led program also included growth equity and private equity. The explanation is that CalSTRS has other programs focused on those sub-asset classes, managed by HarbourVest Partners and Muller & Monroe.

Why it matters: CalSTRS is America's second-largest public pension system with $321 billion in assets under management.

What they're saying: "These emerging manager programs are amazing pipelines to future managers for CalSTRS," says Rob Ross, a senior private equity portfolio manager at the pension. "It's how we first got introduced to groups like Valor Equity Partners and 10x Capital."

• "Graduating from being an emerging manager to an established one is unbelievably hard, but the rate is much higher when you have institutional managers come in early," says Sapphire's Beezer Clarkson. "On average going back to 1995, only 17% of U.S. funds that raised their first fund managed to raise a fourth fund."

By the numbers: CalSTRS reports top-level performance data for its emerging managers funds, albeit on a massive lag and without underlying manager financials.

• Its top performer on paper is a 2017 vintage with a 41.35% IRR through June 30, 2022. Three more mature vintages total $446 million in distributions on $385 million in called capital, with plenty of remaining value and respective IRRs of 8.56% (2005), 10.65% (2008), and 17.23% (2012).

Elsewhere: Montreal-based Inovia Capital this morning announced a US$25 million emerging VC fund-of-funds.

The bottom line: Raising a first-time fund, or even a second or third fund, is arduous even in the best of times. Now, with so many LPs retrenching into the comfort of known relationships, programs like CalSTRS are even more essential to private market growth.