What You Need to Know
- The abrupt exit of Nicole Musicco has created yet another leadership vacuum at an institution that is notoriously tough to manage.
- Based on returns though June, the fund has ranked below 80% of its peers for the past two fiscal years.
- Given its extra risks, investing in sports teams remains an unusual strategy for pension funds responsible for the nest eggs of millions of people.
In her first year atop the California Public Employees’ Retirement System as chief investment officer, Nicole Musicco gathered dozens of staff and laid out an ambitious vision for the largest US public pension fund.
She desired innovation, she told the audience at its Sacramento headquarters. She wanted “stadium deals” and identified professional sports as a frontier for more investing.
During her tenure the fund explored buying a stake in its hometown basketball team, the Sacramento Kings, said people familiar with the matter. Calpers also invited Tony Ressler, the billionaire Ares Management co-founder who owns the Atlanta Hawks, to speak to its board.
But Musicco’s plans for transforming the $463 billion pension fund — informed by her background at pioneering Canadian public pensions and an investment shop known for sports deals — would never come to pass.
On Friday, the 49-year-old resigned after just 18 months, the latest in a string of abrupt exits from the role in recent years. Calpers said she was leaving “to attend to the immediate needs of family” in Canada.
“I care deeply about the work we do and about serving those who serve California, but right now my family needs me back in Toronto,” Musicco said in an emotional speech at a Calpers board meeting on Monday. “As difficult and awkward and far from ideal that is for all of us, this is what I need to do.”
The abrupt exit has created yet another leadership vacuum at an institution that is notoriously tough to manage, shining a light on the high wire that Calpers CIOs walk.
They answer to an often-quarrelsome 13-member board – some of them elected and prone to airing differences in public – while navigating the sometimes-conflicting viewpoints of politicians and career staffers over how to provide for the retirement of the state’s public workers.
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.
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.
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.
At the board meeting, Musicco defended her approach. “There will always be a small minority that fights change,” she said. “But the vast majority of this team embraced change from the start and our mission to create the kind of culture that Calpers truly needs in order to be best-in-class and deliver its promise to its members.”
Calpers spokesperson John Myers said Musicco was hired with the full backing of the pension board and staff leadership. Such fault-finding represents a small number of people lodging “water-cooler criticisms,” he said.
“Musicco’s efforts have been embraced by a wide array of professionals on her team, and many have reached out to offer their support and compassion during this difficult time,” Myers said. “Large organizations thrive by embracing change.”
The pension posted a preliminary return of 5.8% for the year through June. That means it ranked below 80% of its peers for the two fiscal years that wrapped up during her tenure.
After cycling through a series of leaders, strategy shifts and a retreat from private equity in the decade after the financial crisis, the pension system’s portfolio is only 72% funded. Its next CIO will not only face intense pressure to restore the institution’s credibility and clout, but the cold math of hitting a 6.8% return target.
Falling short could potentially force municipalities across the state to make up the difference by increasing payments and digging into their budgets, potentially cutting city services. The pension fund serves more than 2 million people, including police and firefighters.
‘Rich White Men’
Musicco was the second woman to lead Calpers’ investment operations. When the fund enlisted her, it hoped the seasoned private equity investor would boost returns by taking a page from Canadian pension plans that often bypass outside buyout giants and their fees by directly acquiring stakes in companies and seeking other alternative assets.
Musicco spent more than 16 years at the Ontario Teachers’ Pension Plan and a year at the Investment Management Corporation of Ontario before joining RedBird Capital Partners, a private equity firm known for its investments in Italian football team AC Milan and the TV network of the New York Yankees.
Yet grafting her version of the Canadian model onto Calpers proved challenging. In the US, public pension plans usually operate under constrained budgets and salaries. In Canada, there’s less scrutiny and they can lure buyout professionals more easily.
Musicco’s attempt to transform Calpers into a bolder dealmaker meant an adjustment for the roughly 400 employees in her investment shop.
She told subordinates they needed to build a “best-in-class investment office” and was laying the groundwork to hire more staff.
At the town hall, she described a meeting with National Football League Commissioner Roger Goodell. She said she told him the league was running out of “old, rich white men” as a source of money and should deal with Calpers, according to a person’s recollection of the event.
Calpers declined to comment on internal staff meetings, and a spokesperson for the NFL didn’t respond to a message seeking comment.
Musicco swiftly set to work seeking bold bets.