The US$463 billion California Public Employees’ Retirement System (CalPERS) has lost another CIO with Nicole Musicco quitting her position after less than two years for family reasons.
The Canadian national, who has been shuttling between her home in Toronto and Sacramento, was hired from the Canadian public pension fund ecosystem with a view to improving its funding gap through diversification. Most Canadian pension plans are fully funded, with a 105% national average, while the US average ratio is around 75% and CalPERS’s funding status for FY2022/23 was just 72%.
By appointing Musicco, CalPERS was indicating it was seeking to follow PPFs like CPP in boosting allocations to private equities. Musicco joined CalPERS in February 2022 from the US$5 billion RedBird Capital Partners where she was head of its Canadian business. Previously, she managed the private markets portfolio of the Investment Management Corporation of Ontario (IMCO) from 2018 to 2019. Before IMCO, Musicco had a distinguished career with the Ontario Teachers’ Pension Plan (OTPP), which she joined in 2002. She led both private and public equity teams at OTPP and established its Hong Kong office to develop its Asia-Pacific footprint, serving as regional managing director. Musicco replaced Ben Meng, who abruptly departed in August 2020 after just 18 months amid allegations of conflicts of interest.
Musicco made it her mission to address the under-allocation to private equity, which she claimed had cost the fund billions in missed growth. In September 2022, she highlighted the “lost decade” in 2009-18 which cost US$11-18 billion in missed opportunities in private markets. In her overhaul of private markets strategy, she had pushed towards direct lending and direct investing with the development of in-house expertise and leadership, as well as partnerships with other state-owned investors, particularly the Canadian pension giants.
As CIO, Musicco made an immediate and determined advance towards her objective to return private equity allocations to 13% of AUM. In July 2022, CalPERS announced the sale of a US$6 billion slice of its private equity portfolio at a discount and the cutting of ties with external managers. The holdings were sold at a 10% discount compared to their September 2021 value, implying the portfolio lost US$650 million of its value. However, the opportunity cost could have been more pronounced if CalPERS had held on, leaving the portfolio to continue to depreciate in value and leading to higher discounts in the medium-term.
In FY2022/23 (to end-June), CalPERS reversed the 6.1% loss it reported in FY2021-22 to register 5.8% growth, beating its benchmark by 0.3%, amid a rally in financial markets as well as private debt. Its AUM now stands at US$463 billion. Yet, it still only covers 72% of future obligations. The five-year average annual return was 6.1% in FY2022/23 - below the annual return target of 6.8% - while the 10-year average is 7.1%. If it misses its target, local governments may have to slash pension obligations.
Higher interest rates have cast a pall over private equity with the recent loss following gains of 3.3% and 44% in the two previous years. While the Californian fund suffered a hit in private equity (-2.3%) and real assets (-3.1%), its public equity holdings surged 14.1% and private debt grew 6.5% - private equity, private debt and real assets are reported on a one-quarter lag, so reflect end-March values.
With private and public equity assets widely regarded as over-valued, it is likely to take far longer to meet the ambition to become fully funded – and banking on the out-performance of private equity and private debt markets was always a big gamble. Time will tell whether Musicco’s private equity push went too far, too fast for a fund that has been compared to a super-tanker, lacking the nimbleness of the Canadian funds where she perhaps felt more at home. CalPERS Deputy CIO Dan Bienvenue will fill her position as interim CIO while the fund looks for her replacement.