Our efforts to learn more about the private equity industry are revealing how determined public pension funds are to hiding as much as they can, even when they don’t have a legal leg to stand on.
Readers may recall our rapidly-expanding public records dispute with America’s largest public pension fund, CalPERS, where we’ve been forced to sue for private equity returns data. At the same time, we’ve been seeking investment records from other public pension funds in California. That has included filing Public Records Act requests for real estate investment contracts with other public pension systems. So far, we’ve hit a brick wall of obstruction and brazen favoritism toward the interests of investment managers who are keen to maintain secrecy. Gee, you think they have something to hide?
We’re focusing on California because a court there recently ruled that a real estate limited partnership agreement (LPA) is a public record. That means it must be disclosed when a Public Records Act request is made.
Several years ago, the California First Amendment Coalition sued for the release of the LPA governing CalPERS’ investment in a troubled fund called Page Mill Properties II, L.P. In 2010, the San Francisco superior court ruled in favor of the document’s release. The judge rejected various claims made by CalPERS, including the argument that a real estate fund is actually a form of private equity, which would have made the LPA statutorily exempt from release. This leg of the ruling is important: the judge explicitly found that a real estate fund is not an “alternative investment” for purposes of the law because it is not a private equity fund, venture fund, hedge fund, or absolute return fund.
And there are sound reasons for that conclusion. The term “alternative investments” was coined to apply to investments in asset classes that were not ones that institutions had invested in traditionally. By contrast, real estate funds have a long history. Thus, there is good reason to believe that the legislature didn’t think they need the “nurturing” of private equity, venture capital, or “absolute return” funds.
The court also scoffed at CalPERS’ argument that the LPA document constituted a trade secret of the fund’s sponsor. Under court order, CalPERS capitulated and released the document.
We asked the Los Angeles County Employees Retirement Association (LACERA) for a copy of its real estate fund LPAs and received a blanket denial, shown below.
What arguments did LACERA make? We encourage you to read the letter in full; don’t be deterred by its “the lady doth protest too much” quality.
Two major assertions were the same ones that the San Francisco court had rejected in the Page Mill case, 1) that real estate funds are a form of private equity; and 2) that the LPAs are a trade secret of the investment managers. In case you are wondering, we did point out in our original request letter that the Page Mill decision precluded LACERA from relying on either of these claims, but the pension fund asserted them nevertheless.
LACERA offered one other major justification for non-disclosure, which was an invocation of the PRA catch-all exception to document release when “the the public interest served by not disclosing the record clearly outweighs the public interest served by disclosure of the record.” Now how can that strained argument be made to sound plausible in this case, when millions of retiree dollars are at stake? LACERA’s twisted reasoning exposes how it is utterly in thrall to the investment management industry.
According to LACERA, releasing the real estate contract, “risks alienating alternative fund managers and, as a result, jeopardizing its [LACERA’s] access to top-tier investments.” In other words, the fund managers might get their feelers hurt and will take it out on LACERA by not inviting them in to future deals. (Notice how LACERA tries calling them “alternative funds managers” when the court has firmly rejected that characterization on real estate deals. Even though many funds do manage both private equity and real estate funds, these are distinct business, each with their own professionals, and operate with a great deal of autonomy).
So what LACERA is arguing here is that there is an overriding public interest in avoiding any action on LACERA’s part that might displease its investment managers. Essentially, LACERA has said it will never publicly oppose its investment managers, since any strong action to do so might alienate them. That means, like CalPERS, it will defy clearly settled law and require anyone who wants to get real estate or private equity-related records to sue to gain access to them.
Even worse, LACERA is delusional about the fundamental nature of its relationships with its investment managers. They are counterparties in an extremely complex, long-lived transaction. Even in a successful deal, there is only so much money to go around, making this is a zero sum game. When it comes to how to divvy up the money, their interests are adverse. Moreover, there is substantial risk of being short-changed by the manager, since the manager controls the money.
But that’s not how LACERA sees it. Instead, its letter sets forth a charming fairy tale in which investment managers treat LACERA “as a partner within the close-knit alternative asset investment community.” You can’t make this stuff up. And the worst is that LACERA almost certainly believes this blather. That’s how badly captured they are.
The people of Los Angeles County are poorly served by a pension system that, self-admittedly, sees itself as part of a “close-knit” community with investment managers who are, by definition, trying to make as much money as possible off their backs. I bet you can hear the sheep bleating blocks away from LACERA’s offices.
Among LACERA’s many preposterous statements, one is really special. LACERA’s letter acknowledged that the non-disclosure is allowed only “if the allowance of the privilege [of non-disclosure] will not tend to conceal fraud or otherwise work injustice.” As we have discussed, investment limited partnership agreements frequently are used to implement “management fee waivers” that leading tax experts view as illegal, essentially a fraud upon the U.S. Treasury. This is one of the main reasons why giving out LPAs “risks alienating alternative fund managers,” to use LACERA’s own words, since it would be tantamount to blowing the whistle on their tax fraud. Instead of acting as the whistleblower, LACERA has made the decision to assist with the cover-up.
We’re going to get to the bottom of this, and it won’t be pretty.