Our latest update on not-promising state of private equity reform in California ran at Bloomberg yesterday. The editor provided the title “Don’t Let Private Equity Dupe California” but that became Don’t Let Private Equity Keep California in the Dark.
Regular readers may recall that in the wake of SEC and media disclosures of widespread abuses in private equity, such as charging authorized fees, which in most walks of life would be called embezzlement, California Treasurer John Chiang, who also sits on the boards of mega public pension funds CalPERS and CalSTRS, proposed path-breaking private equity legislation to combat this misconduct.
Getting a full accounting of fees and costs that the private equity portfolio companies pay is critical, since major media stories and SEC settlements have demonstrated that that is where most of the chicanery takes place. The private equity firms, which have managerial control over the portfolio companies, can load all sorts of charges onto them that are paid directly from the portfolio companies to entities controlled by the general partners or to individuals close to them. That means they bypass the private equity fund entirely, thwarting disclosure and oversight.
The first version of the bill, AB 2833, introduced by Assemblyman Ken Cooley in February, seemed to fulfill Chiang’s promise. It called for the full disclosure of all private equity fees and costs, including carried interest and fees paid by portfolio companies by all California public pension funds investing in private equity.
Unfortunately, Chiang, who is the bill’s sponsor, left a big escape hatch for private equity firms, and worse, this looks to be by design.
When amendments in mid-March gutted the bill, alarmed supporters contacted Chiang’s and Cooley’s offices. They were assured the weakening of the bill was due to drafting errors and the bill would be restored to its original strong from quickly. That story changed in 24 hours. Hearings on the bill were pushed back two weeks to allow for more wrangling.
And when the pro-reform camp was pushing to have the bill restored to its original form, a key insider revealed what was really going on: CalPERS and CalSTRS would not back even the dead-on-arrival version of the bill. Their support, or at least acquiescence, is key to having it passed. Mind you, official positions on legislation are the purview of the board, not the staff. This means Chiang, who has more stature than anyone else on the board, was not willing, or more likely, never intended to arm-twist his fellow board members to back the bill, irrespective of the captured staffs’ objections.
So what are we to make of the next developments in this saga? The bill was amended again in mid-April. Superficially, the revisions appear to undo the damage done in March. But this iteration still leaves the key term, “related party” undefined. This matters because there is no standard definition and some definitions are virtually contradictory to others. For instance, a private equity firm could take the reasonable-sounding position of using the SEC definition which would again vitiate the bill, as opposed to the FASB definition as backers proposed. Moreover, the sponsors placed the bill on the “consent calendar” in the lower house. That means no hearings, and thus no opportunity to fix the fatal flaw.
It’s not too late to make this right. Chiang must recognize that passing the bill in its current form would represent a failure to fulfill his promise, and use his considerable power to insist on real reform. If he doesn’t, legislators must demand (or be prodded to demand) an effective fix. The financial security of millions of California public employees — and potentially other pension-fund beneficiaries across the country — depends on it.
CalPERS and CalSTRS are trying to pretend in public that they support Chiang’s bill even as they oppose it privately. Worse, the fact that they couldn’t stomach even a version of the bill that was toothless and at most purely symbolic means the odds favor it being watered down even further as it progresses through the Assembly and then the Senate. For instance, California has the unusual procedure called “gut and amend” which the state’s legislative glossary defines as follows: “When amendments to a bill remove the current contents in their entirety and replace them with different provisions.” It’s controversial because it is used to get bills through at the end of a legislative session to revive measures that were stalled. And the objection is that this ploy denies the public its right to have its say during committee hearings. But Chiang and Cooley are using a process that is every bit as anti-democratic by putting the bill on the consent calendar, which means the public is denied the opportunity to testify and in this case, to act as a counterweight to CalPERS’ and CalSTRS’ behind-the-scenes sabotage and get the bill’s shortcomings remedied.
With the effort to keep reformers well away from the sausage-making process, the bill goes next to the Appropriations Committee, having passed last week on the consent calendar in the Public Employees, Retirement, and Social Security committee. Bills that pass on the consent calendar in their policy committee are automatically recommended to be placed on the consent calendar in the Appropriations Committee. Voters can write their Assemblymen, particularly those in districts whose representatives are on the Appropriations Committee and call for the bill to scheduled for hearings. Mind you, this is less than ideal, since committees typically reveal only the day before hearings whether a bill is on the consent calendar or not, again giving insiders an advantage. But weighing in that you care about having a strong, effecitive bill and are not happy with how the public is being shut out will send an important message.
Hence it is time for Naked Capitalism readers to saddle up yet again. The most important is to call or write to Chiang and his fellow elected board member, Betty Yee, as state-level elected officials who also sit on the CalPERS and CalSTRS boards. Please urge both to push for a bill that will provide for the disclosure that Chiang promised, and not the flawed version that is now moving through the Assembly. In addition, tell Chiang that you disapprove strenuously of the public being shut out of this process via the use (as in abuse) of the consent calendar to assure that only insiders will have a say on the bill. Since taxpayers backstop CalPERS, this bill is a matter of broad interest.
Please also circulate this post to your family members, colleagues, and friends in California, particularly government employees, and encourage them to write or call. Be sure to identify whether you are a taxpayer or also a current or future California public pension fund beneficiary.
Mr. John Chiang
California State Treasurer
Post Office Box 942809
Sacramento, CA 94209-0001
Ms. Betty Yee
California State Controller
P.O. Box 942850
Sacramento, California 94250-5872
You can use email to contact Chiang and Yee, and we encourage you, if you write, to send the letter you sent to Yee to other CalPERS board members:
Robert Feckner (President) email@example.com
Henry Jones (Chairman of the Investment Committee) firstname.lastname@example.org
Michael Bilbrey Michael.email@example.com
John Chiang firstname.lastname@example.org; Grant Boyken (Chiang’s staffer; quoted in FundFire) email@example.com
Richard Costigan firstname.lastname@example.org
Richard Gillihan email@example.com; Katie Hagen (one of Gillian’s staffers) firstname.lastname@example.org
Dana Hollinger Dana.Hollinger@calpers.ca.gov
Ron Lind email@example.com
JJ Jelincic firstname.lastname@example.org
Priya Mathur Priya.email@example.com
Bill Stanton firstname.lastname@example.org
Theresa Taylor Theresa.email@example.com
Betty Yee firstname.lastname@example.org; Alan LoFaso (one of Yee’s staffers) email@example.com
For CalSTRS, the only contact information we have is for the board chairman, Harry Keiley. If readers have e-mail information for the remaining board members, please provide it in comments and we will update the post.
Board Chair, CalSTRS
Mobile Phone: (310) 428 3624
I request that you NOT call Keiley unless he fails to respond to an e-mail after two attempts.
If your Assemblyman is on the Appropriations Committee, I strongly encourage you to send a copy of your letter to him. Their names and contact information are here.
In addition, you can send a copy of your letter to the editorial board of the Sacramento Bee:
The Sacramento Bee
2100 Q. St.
Sacramento, CA, 95816
Or you can rework it as a letter to the editor or an op-ed and submit it using this form.
Please circulate this post widely among the people you know in California and encourage them to act. Calls, e-mails and letters are far more powerful in state politics than they are on a national level. An e-mail or letter does not have to be long to be effective. State that you are concerned that the bill is being deliberately shielded from public input, when it already has flaws that mean the private equity industry can circumvent it. And add that you are concerned that it will be weakened further given CalPERS and CalSTRS behind-the-scened efforts to weaken it. Stress that the SEC has exposed that the SEC has criticized all investors in private equity for doing a poor job of oversight, and this bill has come about only as a result of public pressure. These pension funds are serving as the stooges of the private equity industry and it’s important to let the legislature know how misplaced their loyalties are and demand that the public interest be served.
Please see our companion post today on the terms that CalPERS has accepted for its investment in a fund managed by Apollo as an illustration of the depth of capture. The SEC has warned how private equity investors have entered into unduly vague agreements with weak oversight. Chiang was concerned enough about this problem to join other state treasurers and New York state and city officials to ask the SEC for help, confirming that the limited partners were incapable of watching out for their own interests. Having correctly identified that limited partners like CalPERS are no match for private equity, don’t let him cave into their special pleading.