The denominator effect

Some of the largest public pension funds, crushed by losses in the public equity markets, are being forced to either reassess how they allocate their investments or rebalance their portfolios in order to maintain mandated target allocations between asset classes, a process known as the "denominator effect."

Although VCs and some key pension funds have publicly said they expect existing capital commitments will be honored, rumors of asset dumping on the secondary market for unquoted investments, the exposure of limited partners to highly leveraged private equity investments, and suggestions that capital calls might be delayed, are raising concerns about access to capital that VCs normally would consider locked up.

At the same time, the cascading pressure to rebalance private portfolios is providing secondary buyers with a smorgasbord of opportunities, many at very steep discounts.

Rebalancing strategies

One of the largest institutional investors in the U.S. and the largest U.S. public pension fund is the California Public Employees' Retirement System (CalPERS).

At Aug. 31, CalPERS had $25.3 billion invested in its alternative investment management (AIM) portfolio, which includes private equity and venture capital, with an additional unfunded commitment of $26.2 billion, meaning that it had disbursed less than half of its overall committed funds.

Private equity and venture funds typically make capital calls to their LPs over the life of a fund, which can be as long as 10-12 years.

Based on data at the end of last year, CalPERS had committed at least $2.1 billion in capital to firms making life science investments. Of the $2.1 billion, about half a billion was still unfunded, of which two-thirds or about $375 million were tied to funds with vintage years of 2005-2007 (see "The Uncommitted").

This year, CalPERS has made a $125 million commitment to the seventh fund of Essex Woodlands Health Ventures; a $100 million commitment to TPG's third biotech fund; and a $75 million commitment to Clarus Lifesciences II.

All told, the biopharma portion of CalPERS's AIM portfolio accounted for 3%, or $541.6 million, of the fund's total estimated value at June 30.

Since then, CalPERS's global equity fund lost 39% of its value from the end of its fiscal year, June 30, through Nov. 6. That translated into

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