San Jose Federated City Employees’ Retirement System’s board is making changes to how it will handle venture capital investments, shifting decision-making from its investment committee to staff.
The system approved an amendment to its charter during a February 20 meeting. It was accompanied by discussion of how the system would manage diversification, due diligence and headline risk going forward.
Since its 2021 inception to the middle of last year, San Jose Federated’s venture program has committed a combined $102.8 million to seven venture capital funds, according to a report by consultant Meketa. “The total reported fair value of the venture capital program’s investments was $27.3 million at June 30, 2024, which equates to 0.9 percent of the overall retirement system, versus a 4 percent policy target,” Meketa wrote in the report.
Prabhu Palani, the system’s CIO, said during the meeting that this was the first major investment governance revision for the system since 2018, when staff was delegated as an authority on private market manager selection decisions.
“Seven years on, we felt it was time to get delegation of authority for venture capital as well,” Palani said, adding that the system’s staff heard from consultants on this being a best practice among pension plans.
With the change, the board’s investment committee no longer evaluates, approves and terminates investments in the venture capital program during closed sessions. Investment staff follows pacing plans to make those calls, presenting it in semi-annual reports to the board.
This move matches a change recently made by the San Jose Police and Fire Department Retirement Plan. A year ago, when that pension’s board was reviewing the decision, the provided rationale was that the board had lost some expertise in the venture capital area and that the system planned on steadily increasing its private market exposure, including to this asset class.
Both city pensions highlighted the need for more due diligence into the right level of risk for what investment staff identify as the portfolio’s most volatile strategy. The San Jose Police and Fire Department Retirement Plan’s board and staff, during a meeting discussing the venture capital governance change last year, bemoaned the strategy’s long distribution windows and difficulties in accessing funds from quality managers.
San Jose Federated’s venture capital program hasn’t had a track record of positive returns since its 2021 inception. In the most recent quarterly performance review, the assets’ return was about 2 percent in the red.
Based on comments from past meetings, that performance factors into the system’s concerns about codifying limits on how large commitments can be to individual managers, now that such decisions will be made at the staff level.
Anurag Chandra, the board’s vice-chair, expressed during the February 20 meeting that since the allocation target was 4 percent for venture capital, he didn’t want to see “two very large checks written to two managers to fulfill that allocation and then we don’t have proper diversification.”
The board generally agreed during a back-and-forth Thursday that any one investment in a venture fund should be constrained to a 1 percent portfolio allocation, or about $30 million for the plan. Palani also mentioned the concerns could be handled through guidance from the board to staff instead of strict policies.
An official decision on that matter was pushed to a later meeting.
San Jose Federated City Employees’ Retirement System’s board is making changes to how it will handle venture capital investments, shifting decision-making from its investment committee to staff.
The system approved an amendment to its charter during a February 20 meeting. It was accompanied by discussion of how the system would manage diversification, due diligence and headline risk going forward.
Since its 2021 inception to the middle of last year, San Jose Federated’s venture program has committed a combined $102.8 million to seven venture capital funds, according to a report by consultant Meketa. “The total reported fair value of the venture capital program’s investments was $27.3 million at June 30, 2024, which equates to 0.9 percent of the overall retirement system, versus a 4 percent policy target,” Meketa wrote in the report.
Prabhu Palani, the system’s CIO, said during the meeting that this was the first major investment governance revision for the system since 2018, when staff was delegated as an authority on private market manager selection decisions.
“Seven years on, we felt it was time to get delegation of authority for venture capital as well,” Palani said, adding that the system’s staff heard from consultants on this being a best practice among pension plans.
With the change, the board’s investment committee no longer evaluates, approves and terminates investments in the venture capital program during closed sessions. Investment staff follows pacing plans to make those calls, presenting it in semi-annual reports to the board.
This move matches a change recently made by the San Jose Police and Fire Department Retirement Plan. A year ago, when that pension’s board was reviewing the decision, the provided rationale was that the board had lost some expertise in the venture capital area and that the system planned on steadily increasing its private market exposure, including to this asset class.
Both city pensions highlighted the need for more due diligence into the right level of risk for what investment staff identify as the portfolio’s most volatile strategy. The San Jose Police and Fire Department Retirement Plan’s board and staff, during a meeting discussing the venture capital governance change last year, bemoaned the strategy’s long distribution windows and difficulties in accessing funds from quality managers.
San Jose Federated’s venture capital program hasn’t had a track record of positive returns since its 2021 inception. In the most recent quarterly performance review, the assets’ return was about 2 percent in the red.
Based on comments from past meetings, that performance factors into the system’s concerns about codifying limits on how large commitments can be to individual managers, now that such decisions will be made at the staff level.
Anurag Chandra, the board’s vice-chair, expressed during the February 20 meeting that since the allocation target was 4 percent for venture capital, he didn’t want to see “two very large checks written to two managers to fulfill that allocation and then we don’t have proper diversification.”
The board generally agreed during a back-and-forth Thursday that any one investment in a venture fund should be constrained to a 1 percent portfolio allocation, or about $30 million for the plan. Palani also mentioned the concerns could be handled through guidance from the board to staff instead of strict policies.
An official decision on that matter was pushed to a later meeting.
