Op-Ed: Billions in the name of diversity: Does CalPERS’ emerging manager program pay off?

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I’ve spent 30 years in institutional investment management, structuring private equity, private credit, and hedge fund allocations for ultra-high-net-worth families. In that world, you don’t tell a client a strategy is working without a track record net of every fee layer. CalPERS runs the largest defined-benefit pension in the country, serving 2.4 million members, and it doesn’t hold itself to that standard.

The numbers aren’t hidden. They’re just never assembled into an answer. CalPERS’ own AB 890 Year Four Report, filed with the legislature on March 1, shows the fund has moved $20.9 billion to 51 “diverse” managers and $6.2 billion to 27 “emerging” managers since January 2022 – categories built on ownership by women, ethnic minorities, or LGBTQ+ principals. What the report doesn’t show is whether that capital, net of the extra fee layers that come with smaller mandates and fund-of-funds structures, outperformed a comparable slate of managers picked on track record alone. CalPERS can’t legally say it’s selecting managers by demographic category – Proposition 209 bars preferential treatment based on race, sex, or ethnicity in public contracting. So, the fund tracks the outcome it insists it isn’t targeting, publishes the total, and calls it transparency.

The manager roster undercuts the “next generation” framing further. Alongside newer entrants, the fund’s diverse manager allocations for fiscal 2025 include $466.8 million with Thoma Bravo, $140.6 million with Silver Lake Partners, $833.1 million with Lightspeed Venture Partners, and $689.1 million with Veritas Capital - established, multibillion-dollar franchises that have raised institutional capital for decades. Several other firms on the list, including General Catalyst Partners at $744.9 million, are recorded in CalPERS’ own report as having chosen not to disclose which demographic characteristic qualifies them for the category. These aren’t struggling startups fighting for a first mandate. They’re some of the largest names in private equity, counted toward a diversity total on the strength of an ownership stake CalPERS doesn’t require them to explain.

The fund’s own board materials are more candid than its press language. CalPERS’ most recent board education presentation on the Emerging Manager platform reports that its GCM Grosvenor Elevate seeding vehicle has returned roughly negative 33% since inception and that two of its three Canyon Catalyst real estate funds have lagged their benchmark by more than 1,000 basis points across multiple time horizons. The same materials concede that emerging-manager strategies carry higher base fees than the broader portfolio and, more tellingly, that they may have little effect on total-fund performance given their small share of CalPERS’ $556 billion in assets. On the newest platforms, GCM Grosvenor Elevate and TPG Next, the fund’s own staff say it’s “too early to draw conclusions.” CalPERS’ own investment office, in other words, has already conceded the two things a fiduciary standard would need answered before signing off on a program this size: it costs more, and by the fund’s own account, it may not move the needle.

A pension fund is a mathematical contract, not a laboratory for social experimentation. Contributions plus investment returns must equal or exceed future payouts - full stop. Every dollar spent on a fee layer that doesn’t produce a matching or better risk-adjusted return has to come from somewhere else: higher contributions, more risk elsewhere in the portfolio, or a bigger bill for California taxpayers. That arithmetic doesn’t bend for good intentions. CalPERS’ own fiscal year 2024-25 financial disclosures put its unfunded actuarial liability at $153 billion against a 79% funded ratio, even after two strong market years. That’s not a balance sheet that can afford an expensive line-item running on faith.

None of this requires shutting the door on managers who didn’t come up through the usual pipeline. It requires CalPERS to apply the same test to the Emerging & Diverse Manager Program that it claims to apply everywhere else in the portfolio: publish the cohort-level, net-of-fee track record against an appropriate benchmark, disclose the all-in fee drag, and show whether any of it survives contact with the numbers. The fund found time this week to approve a new DEI consulting contract. It has yet to find time to publish the one report that would settle this argument for good.