Something is rotten at the Sacramento Bee. Two stories in the last week were jiggered very much to favor CalPERS. One will take more unpacking, so we’ll start today with the more obvious case.
Eileen Appelbaum, co-author of the landmark book Private Equity at Work, took note of the pending private equity benchmark change at CalPERS that we wrote about last week. She is a member of the Center for Economics and Policy Research, and CEPR pitched having her write an op-ed for the Sacramento Bee. She submitted a draft, which was edited and scheduled to run in the print edition Monday morning, which meant it would appear online at the worst at the same time, more likely the evening before. It was important, as the SacBee editors knew, for the story to run before the Investment Committee meeting on Monday. The story links to the Investment Committee agenda, clearly showing that the public session started at 9:00 AM, Monday November 13. The agenda item in question, 6a, was covered before 10:15 AM.
The reason this article was important is the only things CalPERS is, or was, afraid of is the Sacramneto Bee and the state legislature. Having the Sacramento Bee call attention to the fact that the proposed private equity benchmark change was an anti-beneficiary, anti-taxpayer move with no precedent (indeed, it runs counter to the advice of every independent expert) had the potential to embarrass the normally shameless staff and board.
So what happened? The article didn’t run Monday morning as scheduled as of last week. It went online Monday afternoon, only after CEPR cleared its throat and politely asked WTF happened?
And that means the article effectively went from appearing at the time when it would have most impact, right before the relevant Investment Committee meeting, when it would have put CalPERS staff and board on notice that experts strongly disapproved of this change, to being irrelevant.
In combination with the other story I will post on in the next few days, it looks as if the Sacramento Bee is no longer operating in an independent manner and either as a matter of policy, or by virtue of certain insiders knowing how to manipulate the process, to now be in the business of protecting CalPERS instead of reporting on it.
I provide the contact details for the relevant editors at the end of the post and strongly urge California residents to write and tell them it is obvious that they have become too close to powerful interests in Sacramento.
Key sections of Appelbaum’s short piece, Private equity isn’t a good investment for CalPERS (she was given only 400 words, down from the already-tight 600 words she was given in her last op-ed. In retrospect, that was a tell):
Median returns for private equity funds launched since the financial crisis have failed to beat the stock market by enough to compensate for increased risk. Pension plans know that high prices paid to acquire companies today mean lower future returns.
So does the pension giant plan to reduce its $26.2 billion allocation to private equity? Is it going to outsource management of these investments, pay fees and risk even lower returns?
nstead, staff is asking the California Public Employees’ Retirement System board this week to lower the bar. This may make private equity investments look better, but will do nothing to assure that these investments earn adequate return….
Does the staff believe that investing in private equity has become less risky? Or is this an admission that returnswill be lower? Perhaps the staff is just looking for an easy “A.”
CalPERS is now engaging in Trump-level intellectual dishonesty and brazen disregard for beneficiaries’ and the public’s interest. At this Monday’s Investment Committee meeting, staff will present its plan to use a measurement gimmick to pretend that private equity is much less risky than it actually is. No independent finance-literate professional would endorse such a move. 1 The apparent motivation is so that the giant public pension fund will hopefully no longer keep falling short of its private equity benchmarks, as it has done regularly over the last ten years.
Despite the technical sound of this change, it has huge practical significance. First, CalPeRS is admitting that it expects private equity returns to be significantly lower in the future.
Second, this is finance malpractice. This is tantamount to a doctor getting a EKG that shows his patient is at risk of getting a heart attack, but telling his nurse to recalibrate the machine and run the tests again so that it gives a normal reading. And worse, in this case, the doctor is fixing the results because he’ll make more money from the false results, and the patient is, say, running for President and plans to release the deliberately misleading medical records to present himself as being in good health when he isn’t.
The fact that CalPERS has consistently underperformed its private equity benchmarks since 2014 and its own consultants have projected that CalPERS will continue to do so over the next decade means that CalPERS is not making enough in private equity to justify the additional risks.2 That means CalPERS needs to stop investing in private equity or radically revise its approach. Because the fees and costs of investing in private equity funds are so mind-numbingly high, CalPERS has sound alternatives, such as bringing much more of its private equity program in-house (which would admittedly take time) or going to a public markets replication strategy, which several studies have found gives net returns higher than investing in private equity3 (which might only work for a few years since other funds would no doubt copy it but that would give CalPERS some transition breathing room).
But rather than do the right thing, which would be work, CalPERS is instead sticking doggedly with a failing status quo. And as we’ll discuss further below, the only big change it is planning to make, that of moving some or all of its private equity program over to Blackrock, will only make its underlying performance problem worse by introducing another layer of fees and costs.
Specifically, CalPERS plans to make private equity look better than it is by understating its risks and changing its stock market component of its custom benchmark to one that is also more flattering. So CalPERS is cooking the books to favor private equity every way it can.
There was an additional tweak to the benchmark that I missed: that CalPERS, in a not-clearly-described manner, was going to change from using an arithmetic average to a geometric average. No matter how this is done, it will again have the effect of making the benchmark more favorable to private equity.
Again, if you are in California, please write the relevant Sacramento Bee editors and asked why they neglected their duty of journalistic independence by moving the op-ed back, which clearly was a favor to CalPERS. And if they don’t know why, it’s high time they found out who pulled strings on behalf of CalPERS.
Gary Wortel, President and Publisher, firstname.lastname@example.org
Dan Morain, Editorial Page Editor, email@example.com
Shawn Hubler, Deputy Editorial Page Editor, firstname.lastname@example.org
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