Honestly, I’m still amazed we prevailed, since usually by the time powerful and insular organizations like CalPERS are ready to implement new (bad) policies, the scheme is too far advanced to be halted.
On Monday, December 7, we saw a remarkable agenda item on CalPERS’ website that was set for a vote at the Investment Committee meeting the following Monday December 14. Here’s the overview from our post on Friday, based on our Bloomberg op-ed that ran last Thursday, December 10:
What would you think if a pension fund responsible for 1.7 million beneficiaries said it was going to stop considering the the riskiness of one of its biggest investments?
Incredibly, that’s what the board of the California Public Employees’ Retirement System, America’s biggest public pension fund, might do on Dec. 14. One item on its meeting agenda would eliminate the strategic objective to “maximize risk-adjusted rates of return” on private equity, which involves using large amounts of debt to buy out companies with the aim of reselling them at a profit. This is a major policy change, engineered by the people who manage Calpers’s private equity investments.
Pay attention, because this is a case study in how CaLPERS’ staff manipulates the board to its own advantage.
CalPERS is apparently making this change in response to its poor performance in private equity over the last ten years. So CalPERS is acting like a fat person who decides to throw out the scale rather than look at its weight problem. And its enabler, its private equity consultant Pension Consulting Alliance (“PCA”) hasn’t even attempted to muster an intellectual justification to the board for this change. In a September board meeting at CalPERS’s Sacramento sister, CalSTRS, another PCA client, the account manager for both funds, Mike Moy, blandly acknowledged that private equity investors have a performance problem but then blamed the benchmarks!
Alert readers may notice the very short time frame between when we saw the astonishing CalPERS planned policy change, and when Bloomberg ran our op-ed. We are very grateful for our editor at Bloomberg, Mark Whitehouse, understanding the time time sensitivity of this matter, persuading the higher ups to consider and run our piece soon enough for it to inform discussion, and for doing his usual exemplary job of editing (and diligent fact checking!).
We also alerted our contacts, in particular our journalism allies, particularly the ones who have been concerned about the way limited partners like CalPERS have continued to circle the wagons with private equity general partners. That has continued in the face of the SEC telling them, in the words of former enforcement chief, Andrew Bowden, that they were having their pockets picked, as their own performance records showed that they had not been earning enough in the way of returns over the last ten years to justify the risks of investing in private equity.
Some of our colleagues in turn were so gobsmacked by the combination of audacity and stealthiness of CalPERS’ scheme that they started sending alarms to people in their networks.
While some were genuinely frustrated that they were already jammed and could not turn around an article before the CalPERS vote on Monday, others were able to saddle up. Dean Starkman of the Los Angeles Times, who had reported skeptically on CalPERS’ carry fee disclosures on November 25 (CalPERS fee disclosure raises question of whether private equity returns are worth it) worked with Melody Jacobesn on a story that ran yesterday morning, Calpers is set to change private equity policy.* Chris Flood of the Financial Times also worked in a mention of the pending policy change at the end of his story on a new study that quantified some of private equity’s hidden fees.
But a key effort came from Eileen Appelbaum and Rosemary Batt, the co-authors of the highly respected book Private Equity at Work. They placed an op-ed at the Sacramento Bee, which ran in its print edition Monday morning, right before the board vote. The two things that CalPERS is afraid of are the Sacramento Bee and the state legislature.
CalPERS apparently demanded a retraction but neither the SacBee nor Appelbuam and Batt backed down. CalPERS’ argument boiled down to claiming that they weren’t eliminating the private equity benchmark in the Monday vote. But it was not hard for independent parties to see the game CalPERS was playing. By eliminating the policy language that returns be risk adjusted today, they could axe the risk-adjusted benchmark in 2016 when they review and revise all their benchmarks.
I saw most of germane section of the board meeting today (unfortunately I got a phone call at the wrong time, so I did not see it all). The CalPERS staff came in signaling that they were prepared to give ground. Remarkably, the board actually had a discussion of issues, something that rarely happens. The Los Angeles Times, in CalPERS shelves controversial private equity policy, gave a recap:
The state’s biggest public pension fund has repeatedly missed a key performance goal for its controversial private equity investments.
But a CalPERS committee said Monday that the fund’s staff could not strip language from a written policy that required them to aim to meet that benchmark – returns roughly 3% higher than the stock market to compensate for private equity’s risk.
By voice vote, the committee defeated the proposal to change the policy so that the new objective would have been simply “to enhance” the pension fund’s private equity returns.
And this part is also important:
At the meeting, Wylie Tollette, CalPERS chief operating investment officer, told the committee that the change was part of the staff’s effort “to eliminate vague and untestable language from all the investment policies.”….
On Monday, Andrew Junkin of Wilshire Consulting told the committee that it doesn’t make sense to lower the benchmark to less then 3% over the stock index.
“At that point I don’t think private equity is worth it,” Junkin said.
In other words, despite CalPERS’ efforts to depict foundational concepts of finance like being paid more to assume more risk from its strategy document as “vague and untestable,” one of CalPERS’ key consultants spoke up against the underlying premise. Andrew Junkin’s remarks at the meeting were even stronger than the Los Angeles Times extract.
Recall that we’ve documented that one of CalPERS’ other major consultants, Pension Consulting Alliance, has been pushing the idea at CAlPERS and CalSTRS of the indefensible idea of an “absolute return” which is tantamount to “no benchmark” and that the CalPERS chief investment officer Ted Eliopoulos has worked similar language into some of his overviews of private equity. So Junkin is to be commended for putting the kibosh on this effort.
Not that CalPERS is giving up, mind, you. The Los Angeles Times says the giant pension fund “still planned to consider revising the benchmark next year.”
CalPERS will attempt to make a rebuttal in the SacBee later this week. This ought to be entertaining. They have yet to learn the wisdom of the saying, “When you are in a hole, quit digging.
Most important, thanks to readers for all your interest and support and most of all, for those of you who wrote letters and made calls to state officials and media outlets in California, for your efforts. They can and do pay off!
*Weirdly that story, which had Melody Jabobsen as the lead author with Starkman is no longer up at the Los Angeles Times, and the story on the result of the vote, with a different headline, with Jabobsen as the author and Starkman credited at the end as having provided assistance, is now up at the same URL. But you can see plenty of footprints of the older piece. For instance, the Sacramento Sun-Times still has the Calpers is set to change private equity policy headline, and this opening section, followed by a link ot the Los Angeles Times website:
When it comes to its controversial private equity investments, the state’s largest pension fund has struggled to meet the performance goal set out in its written policies. Now the California Public Employees’ Retirement System has proposed stripping its policy of that specific return objective – which had been defined as earning 3% more than the broader stock market to compensate for the risk of investing in the private firms.
My recollection of the original story is the Los Angeles Times had obtained a quote from a CalPERS spokesperson, so they were on notice.