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Bloomberg gets props for quickly publishing a detailed account of the tenure of CalPERS’ suddenly departed Chief Investment Officer Nicole Musicco, in Biggest US Pension’s Investment Boss Pushed Sports Deals Before Calling It Quits. It’s clear some members of CalPERS’ staff cooperated with the story.1
Bloomberg reporters Eliyahu Kamisher and Dawn Lim lay out a set of facts that anyone who has been in finance or even in a large organization will recognize as that of an executive floundering. This is no surprise given that the search process, under the guidance of CEO Marcie Frost, knowingly chose someone lacking the experience that the Chief Investment Officer search had set forth as required. So CalPERS did itself and Musicco harm by rejecting two qualified white male finalists in the first round, making its diversity requirements paramount, rebooting the search and then choosing Musicco, who they had rejected in the first round.
It may appear unseemly for this blog to say the quiet parts in the Bloomberg story out loud. However, the damage to Musicco, to the extent she didn’t manage to line up a new job out of Toronto that she could take up after a short bit of “family” downtime, the damage was already done by the implausible cover story for Musicco’s abrupt exit, as we explained yesterday, and the further backstory from Bloomberg. So we are unpacking the Bloomberg story to make clear to Frost and the CalPERS board that it’s obvious Musicco’s tenure was a failure, and the blame lies with them for having chosen her in the first place.
First, note that the Bloomberg piece was entirely about what Musicco was attempting to do in private equity, which was sports team deals, more private equity deals in house, and more venture capital. CalPERS’ current private equity allocation is 8%. CalPERS had set a target to increase that to 13% and also to invest 5% in private debt. Together that would be 18% of the portfolio. The article, however, gives the impression that Musicco was spending all her time on private equity. Admittedly private equity would consume greatly more time than the liquid market investments or real estate, because that is where most of the risks lie. But the article gives the strong impression that Musicco had left the rest of the portfolio on auto-pilot and was insufficiently involved in what the Managing Investment Directors of those strategies were up to. But Musicco had been hired to be, and was paid in accordance, with being Chief Investment Office, not the head of private equity.
Second, Musicco comes off as thinking she could commute from Toronto on a long-term basis. From our post yesterday:
Executives do not quit and give only two weeks of notice. Musicco was either forced out or left angry and wanted to make a statement.
That does not mean that the cover story is not true, but that is it not likely to be the operative truth. The germane parts of CalPERS’ press release:
Musicco said the decision to leave CalPERS will allow her to attend to the immediate needs of family in her native home of Toronto, Canada.
….Musicco said. “However, at this time I need to prioritize those who need me the most, my family and children.”
Musicco, who joined CalPERS in the spring of 2022, has been shuttling between Toronto and Sacramento in recent weeks to help members of her large, multigenerational family.
As this is written (and the text was almost certainly negotiated between Musicco and CalPERS), this makes Musicco look like a flake, that she has not worked out that she’s be expected to be in Sacramento most of the time and somehow overlooked the implications for her personal life.3
It is also more than a little convenient that Musicco is leaving at the end of annual bonus cycle.
From the Bloomberg article:
It didn’t help that she was frequently absent from the office as she commuted from her family’s home in Toronto, said people familiar with the matter…
Still, as Musicco wrapped up her first year on the job, some longtime employees expressed unease to each other about the decisions of the newly arrived boss, who frequently crisscrossed the continent.
Her constant travel not only put a strain on Musicco, according to a person close to her, but also on senior staff, who had been eager for a clearer blueprint on how the fund would meet its investment goals after an 18-month leadership gap.
Independent of Musicco’s lack of necessary chops, this practice alone meant Musicco would never work out. You do not oversee a 400 person staff from three time zones away, particularly as a newbie and while also trying to implement major strategy changes.
Third, Musicco was not able to develop staff or alternatively, make enough new hires to fill skill gaps and help bring the others along . Again from Bloomberg:
Musicco’s attempt to import the so-called Canadian investment model, which emphasizes direct investments to reduce the fees paid to outside managers, didn’t sit well with key investing staff at Calpers, because there was no clear path communicated on how to do it, according to people close to the pension who were not authorized to speak publicly.
The Bloomberg story is not clear on what meeting this objective would entail and why CalPERS employees had a good reason to be unhappy about the lack of guidance, let alone action.
Doing investment deals in house requires a vastly higher level of expertise than investing in funds. Staff has to be able to perform competitive and microeconomic analysis, model (or evaluate others’ models) of company performance and stress test them, review and negotiate deal terms and definitive agreements (a lot of the transaction execution work can be fobbed off onto deal counsel but staff needs to be involved). It sounds as if Musicco merely handwaved about this problem, and never articulated, or even thought through, how to get CalPERS from A to B.
Mind you, it would not have been unreasonable to expect Musicco to play a direct role in staff training…charitably assuming she was expert enough to do so. By contrast, former CalPERS Chief Investment Office Mark Anson, who holds Ph.D. and Masters in finance, Chartered Alternative Investment Analyst, Chartered Financial Analyst, Certified Public Accountant, Certified Management Accountant, and Certified Internal Auditor professional degrees, and was also a member of the New York and Illinois bars, would train CalPERS staff in investment theory and practice after normal work hours. Anson was reportedly very well liked.
Admittedly Musicco handwave about increasing the size of her team:
She told subordinates they needed to build a “best-in-class investment office” and was laying the groundwork to hire more staff.
Ahem, you can see why the current CalPERS staffers were skeptical about Musicco’s leadership. 18 months in a long time to still be “laying groundwork.”
Fourth, Musicco tried forcing the square peg of CalPERS’ strategy into the round hole of her pretty narrow private equity skills. She had just come from RedBird Capital, a firm with just under $9 billion in assets under management and has verticals such as in sports, media platforms, and financial services. RedBird also has a very large networks with family offices and entrepreneurs which provide its deal flow.
Musicco was only at RedBird for less than three years and is highly unlikely to have developed much in the way of strong relationships with key people in RedBird’s network, even assuming RedBird would look kindly to her trying to end run them.2
As the Bloomberg headline signals, Musicco ran hard after sports deals because that was apparently one thing she thought she could do (note there is no evidence that her personal dealmaking efforts ever succeeded). From the article:
Some were also irked by Musicco’s focus on sports, technology and venture capital investments, saying she hadn’t clearly outlined how Calpers would pull off such deals, and specifically, how such a massive institution could successfully deploy money at scale and move the needle on returns.
The concern about not being able to “move the needle,” particularly with venture, is completely valid, The highly respected Chief Investment Officer of CalSTRS, which is also a multi-hundred dollar pension fund but a bit smaller than CalPERS, has repeatedly stated his envy for the potential high returns in venture but says it makes no sense for CalSTSR because they can’t invest enough in decent deals or funds to make a difference.
As for sports, not only does that sector suffer from the same “not big enough to make a difference” problem, but there is the additional problem of exits requiring greater fools in the form of rich vanity buyers:
Private equity firms have emerged as major financiers of professional sports teams, but given the additional risks, it remains an unusual investment strategy for pension funds responsible for the retirement nest eggs of millions of people.
Sports teams are “toys for billionaires” and a poor fit for a public pension fund, said Matt Cole, who left Calpers in 2022 after 16 years and now heads Strive Asset Management, the firm co-founded by Vivek Ramaswamy.
“They’re an underfunded pension and they keep doing the same thing; there’s desire for change,” Cole said. But if you allocate money to a team, “you’re hoping there’s a billionaire down the line that will give you a good exit,” he said. “It was one of the most baffling strategies that I’ve heard.”
Finally, several contacts speculated that Musicco might be involved in, or seen as in too much risk of, another Ben Meng style conflicts of interest problem. The Bloomberg authors were so kind as to credit us for publicizing the photo, taken by a CalPERS staff member, of Musicco and her son seated courtside at a Sacramento Kings playoff game. The reporters carefully tiptoed around the conflicts of interest matter, since CalPERS maintains Musicco bought the tickets. Of course, that excuse is based on the bogus pretense that owner seats are market goods. From the article:
A flashpoint for some staff disgruntled with Musicco was a photo that began circulating around the Calpers office and appeared on the blog Naked Capitalism. The picture showed Musicco and her son at the National Basketball Association playoff on April 15 between the Golden State Warriors and the Sacramento Kings.
She was pictured next to Joe Lacob, the owner of the Golden State Warriors. Lacob did not respond to a request for comment. Myers said Musicco wasn’t acquainted with him before the game.
She also sat in the vicinity of Ranadivé, the owner of the team Calpers explored investing in, two people familiar with the matter said.
Some staff said the scene showing the guardian of civil servants’ retirement savings sitting in pricey courtside seats, near a potential investing counterparty, risked blurring personal and professional lines.
But now that it is public that Musicco had sports deals as her top priority, it shows the conflicts of interest risk was real.
Musicco has carry in three different RedBird funds. Given her acting as if what she knew best deal-wise was sports, it’s a pretty safe guess that every fund contains some sport holdings.
If Musicco were to get CalPERS into a category in sports where not that many deals happen in a year, and any of her RedBird funds were in that category, she would arguably be enriching herself merely by having CalPERS as a bidder on a sale (anyone with an operating brain cell puts up a property for auction unless shopping it would be destructive to the enterprise; the rule of thumb in my day was another bidder on a deal was worth 10% more in sales price. The same principle applies now even if the value of another bid is now only 5%)
So as one influential CalPERS beneficiary summed it up, “Musicco was a hot mess”.
But as the saying goes, God protects fools, drunks, and apparently CalPERS. The Wall Street Journal has a new story up in its premium paywalled section, Departure of Calpers’ Musicco Casts Pall on Its Private-Equity Push. If you have been reading our private equity coverage for these many years, that is entirely a good thing because private equity hasn’t outperformed plain old listed stocks since 2006 or so, and with so much hope-addled money chasing private equity, there is no reason to think relative returns will improve.
And remember, private equity is riskier than liquid stocks, so on a risk-adjusted basis, it underperforms those now seen as boring equities.
So Musicco’s CalPERS failure actually did them a favor by further delaying them bulking up on a dubious investment proposition.3
1 You’d normally expect a witch hunt, but so much intel from CalPERS sources suggests that Musicco’s poor performance was an open secret, and that some of what would normally be criticized as leaks were even sanctioned.
2 RedBird might bring CalPERS co-investment opportunities, but they already have a network of limited partners if they felt the need for more equity in a single deal than they would normally put up. So anything presented to CalPERS would likely suffer from adverse selection.
3 In fairness, if CalPERS could do direct deals, it would cut out a lot of the fees and the net returns should be attractive. But CalPEERS can’t have a the sort of pro it needs and remain attached to its diversity fixation. And at least as big an obstacle is Marcie Frost would have to be willing to let a truly high skilled Chief Investment Officer be the voice of CalPERS on investments, and she would need to relegate herself to repeating his pronouncements.