We were surprised and pleased when a reporter from the Reuters publication peHUB, Chris Witkowsky, contacted us a couple of days ago about the suit we had filed against CalPERS, the California Public Employees Retirement Systems, over their refusal to provide us with information they had given to three Oxford academics who had used that data as the basis for a recently-published paper. As readers may recall, under the California Public Records Act (PRA), once an agency has given out a record to one member of the public, it has forever waived the right to claim any exemption from disclosing the records to others.
So even though we were glad to have a well-known publication take interest (peHUB is widely read in the private equity industry), we weren’t certain how the piece would turn out, since the author would clearly talk to CalPERS and who knows how persuasive he would find them to be.
This turned out to be as positive as I could have imagined, and I believe that was solely due to the fact that the position CalPERS is taking in trying to deny me the information is simply indefensible. Moreover, the reporter confirmed some things we’ve strongly suspected but could not prove.
The article, Financial blog asks court to force CalPERS to release private equity data, goes through the background we recited in a post last week and in our court filing.
The critical, and brazen part, is that CalPERS, after saying in writing on December 18, 2013, that they’d be sending us the information, reversed themselves on January 27, 2014 and tried claiming after conducting an “extensive search” that “CalPERS staff” had never given the researchers the data. We at first thought this was an effort to treat us like rubes, since we had asked for data provided by CalPERS, not data provided by “CalPERS staff”. CalPERS has for some time kept its PE data in third party repositories. But under well-settled California law, actions taken by agents within the scope of their agency are imputed to the principal. Thus, even if as a matter of form, the data was provided directly by LP Capital or another CalPERS data repository to the authors of the Oxford study, it would still be disclosable under the PRA.
But we learned it was even worse than that. We wrote the authors of the paper, and the lead author, Professor Tim Jenkinson, replied to us and was explicit: he and one of his fellow authors, Ruediger Stucke, had gotten the information directly from CalPERS staff.
So one matter that had puzzled us was how CalPERS could keep making this patently untrue claim, that they’d never heard of these academics, particularly since, if someone were naive enough to believe CalPERS, it meant the academics weren’t on the up and up (as in they’d gotten the data through an unauthorized route, like a disgruntled former employee, which would raise doubts about the accuracy and completeness of the information). Here is CalPERS’ statement:
“CalPERS has been unable to locate any documentation of a written PRA request from the authors of the Oxford University article for the referenced private equity data. However, we stand ready to provide any private equity information that is discloseable under the PRA,” CalPERS said in an email in response to a series of questions.
This is the pettifogging bureaucratic version of drunk under the streetlight behavior.* The PRA stipulates that if a record has been give to a member of the public for any reason, not just to satisfy a PRA request, it is disclosable. So limiting their search to PRA requests was a form of stonewalling.
On top of that, Jenkinson confirmed for the record what he had told me via e-mail:
However, one of the authors, Tim Jenkinson, told me he and his colleagues did indeed get the information from CalPERS in late 2009. The authors then added to their data each quarter from CalPERS’ web site, which is why the study runs to 2012. “I have no idea why they are saying they didn’t give us the data, except it was nearly five years ago and maybe they haven’t looked far enough back in their archives,” Jenkinson said.
And the story ended with a generous sign-off:
Personally, I’m hoping CalPERS releases all the information. I’m curious to see what Naked Capitalism has in store once it gets its righteously indignant hands on the data. Webber wouldn’t divulge any future plans about coverage, but Naked Capitalism has a history of smart, scrappy articles attacking what it feels are injustices being committed in the name of capitalism.
* A classic joke is that someone walking at night finds a drunkard circling under a lamppost looking at the ground. The passer-by asks what he’s doing.
“I’m looking for my car keys.”
The sober person point out that there are clearly no car keys in sight and asks if he’s retraced his steps to find where he might have lost them.
“No, because the light’s better here.”
The guy running CalPERS is hoping he can stonewall long enough to collect his bonus. He doesn’t understand that stonewalling will probably get him fired.
This is getting serious. I heard a rumor they’re hiring Nathan Thurm to handle for them from here.
No more patsies on the other end of the line when you or Reuters calls . . .
Excellent! And it’s good to read the deserved praise for you and NC, Yves.
“righteously indignant”? “scrappy”? I would be a little leery of peHub’s agenda.
If regulators were regulating, CalPERS should have already been disciplined for not complying with PRA.
So nice to read this. Looking fwd to coffee and popcorn with NC for many mornings to come. Go Yves!
Agreed. Popcorn time it is! If I had extra time I think I’d like to make a puppet resembling the pettifogging bureaucratic drunk under the streetlight. nice image.
From the abstract of the Jenkinson et al article:
We find evidence that fund valuations are conservative, and tend to be smoothed (relative to movements in public markets): The exception to this general conservatism is the period when follow-on funds are being raised. We find that valuations, and reported returns, are inflated during fundraising.
Smoothing is what one would expect in the absence of quoted share prices. Valuing privately-held companies on the basis of measures such as price-to-sales, price-to-book, price-to-Ebitda, etc. gives a much smoother time series than publicly traded share prices, which regularly experience crashes and bubbles.
Presumably the smoothing effect will help cushion Calpers’ losses in the next bear market. But it also means a less robust recovery when the next bull market begins. Meanwhile, the only certainty is the high fees collected by PE firms, which are easier to extract in a non-transparent environment.
Why do you suppose they are so desperately defending their stone wall, and what do you expect to find? Skimming, self-dealing? Ponzi? Insolvency?
It is well known that CalPers was a milk cow for at least one large private equity firm, Apollo. What Yves is likely to find are other absurd fee for service arrangements among PE firms – and apparently there are securities laws against that sort of thing by PE firms. Hopefully, such inquiry will raise the ire of both beneficiaries and legislators forcing CalPers to invest more conscientiously, perhaps even accepting a slightly lower rate of return at much lower risk. How much risk would you want your pension managers to take?
At a minimum I would expect to see a high churn rate and associated high fees. I expect Yves analysis to show clearly how the world of finance is undermining the stability of public pension funds.
Private Equity doesn’t have “churn” like the public markets. Not saying that fees can’t be high, but they are not trading more often in order to create transaction fees.
Wow, you seem blissfully unaware of the fees they rip out of the portfolio companies. And the churn in the public markets is at the discretion of the investor, not at all the case in PE, where they get paid fees for each and every investment banking transaction they do at the portfolio level.
You really need to do better if you are going to troll for the PE industry.
I was in no way saying that PE doesn’t extract high fees that are potentially harmful to investors and the companies. I was simply taking issue with the idea that PE managers churn to create fees. Most PE funds are not buying and selling companies like public equity managers, but are instead buying companies to hold for at least a couple years, usually longer. So, churn is the wrong term to use. Disastrously high fees charged to portfolio companies that help nobody but the manager? Sure, that is a fine argument to make.
As for churn in the public markets, I think that term applies much more to transaction-fee based advisers, which are not really at the discretion of the investor, even if they are operationally making the trades. If an adviser recommends a trade that they get a cut of the fees on, most investors are going to trust their adviser’s advice without thinking about how the adviser is benefiting.
“to show clearly how the world of finance is undermining the stability of public pension funds.”
They could just be asking, “What good for us will come of this”. The answer is probably more scrutiny, more lawsuits, more problems.
The might even be breaking a NDA or two. Oh… and maybe the problems listed above.
LP Capital is mentioned in passing as possibly having released the data. I’m curious if this could be verified. They were recently fired by CalPERS, so the link could be harder to retrace. But it seems possible that it was done that way to be at arm’s length and potentially deniable.
No, anything that LP Capital did would be at the direction of CalPERS, particularly since the authors of the paper have stated repeatedly that they dealt directly with CalPERS. This was not a case of someone unauthorized at LP Capital slipping documents to Oxford dudes in a dark alley.
“Personally, I’m hoping CalPERS releases all the information. I’m curious to see what Naked Capitalism has in store once it gets its righteously indignant hands on the data. Webber wouldn’t divulge any future plans about coverage, but Naked Capitalism has a history of smart, scrappy articles attacking what it feels are injustices being committed in the name of capitalism.”
These words would make a wonderful introduction to the NC blog: “righteously indignant,” “smart,” “scrappy” and “attacking…injustices.”
I am pleased that Reuters (53% owned by the Canadian Thomson family who publish The Globe and Mail national newspaper which is quite good) treated NC well.
Perhaps they need to change the name from CalPers to CAPERS.
have you asked the Oxford authors for the FOIA reference number that should have been attached to the documents? It is usually on the accompanying cover letter or top sheet or if it came electronically, in the file name. CalPers should be able to trace the request based on the ref number.