Some members of the press have commented privately on what they saw as a power grab last week by CalPERS CEO Marcie Frost. Chief Investment Officer Ted Eliopoulos announced his coming resignation from CalPERS during the same set of board meetings in which the board conferred Frost more power over the Chief Investment Officer position, including giving up the board’s right to veto a new hire.1
This morning, we see an even more crass and obvious power grab by CalPERS’ staff: that of trying to railroad through a private equity initiative that the board has not yet approved or even considered in a serious way.
CalPERS stunningly issued a press release this morning Sacramento time, which we’ve embedded at the end of this post, along with a short accompanying set of slides. The press release – hastily written, if typos are any indication – presents this move as a done deal, with CalPERS about to start recruiting professionals to man new investment vehicles that CalPERS will fund. 2
In an unheard-of step, board member Margaret Brown issued a press release of her own, objecting strenuously to the CalPERS press release as well out over its skis, and an apparent ruse by staff to get the board to bless nebulous private equity napkin doodles and commit billions of dollars of funding.
From her press release, which we include in full at the end of this post:
California law requires that CalPERS board members act always consistent with their fiduciary duty, which means exercising care and diligence in overseeing investments. The board cannot discharge its fiduciary duty with respect to re-structuring any part of its $40 billion private equity portfolio without first receiving detailed, written budgets, business plans, and analysis of risks and materials supporting claimed projected returns. I, for one, intend to see that the board discharges its fiduciary duty
Former board member JJ Jelincic also weighed in:
The new company is designed to avoid responsibility and accountability. It is designed to avoid the disclosure requirements of California Law which the investment office leadership has opposed since day one. It makes sure that no one on the Board or staff can be held accountable for investment decisions or performance.
The plan offers no path to bring the investments and required investment skills in house which is the real key to reducing costs and getting a real alignment of interest.
Understand what is going on: CalPERS staff is trying to move forward with a massive commitment of funds to utterly new, untested schemes without any budgeting, planning, or analyses.
We have also argued, and Jelincic confirms, that the big driver of this move is not what CalPERS ought to be doing, which is to contain private equity fees and costs, but to reduce transparency and accountability.
If CalPERS board and staff think they can shirk their legal duties in light of the path-breaking fiduciary lawsuit against KKR, Blackstone, PAAMCO, and Kentucky Retirement System trustees and staffers, they are smoking something very strong. The class action bar knows, thanks to the embarrassing slides that CalPERS put out as material supporting its press release, that the CalPERS review process is so obviously non-existent that the board members, executives, and anyone who joins this operation are a litigation target out of the box.3
If you think I am exaggerating about the embarrassing state of the CalPERS plans, take a look at those slides, which I have also embedded at the end of the post. I have been around a very long time and I have never seen anything remotely this ridiculous.
Just look at the last page. CalPERS has a chart which says if the board waves its magic “actions” wand, returns will improve and take pressure off CalPERS funding. By presenting a few images with hardly any words, and pretending this is tantamount to having a strategy, CalPERS is advertising that its board and staff are a bunch of rubes, ready and willing to have their pockets picked on a massive scale. It would be nice to think this were some sort of sick joke, but it isn’t.
The document confirms that CalPERS is still pursuing two ideas that CalPERS made public earlier, that of a private equity fund of funds, and “late stage venture capital.”
The new information tidbit in the slides is that CalPERS appears to be considering one new way to enrich private equity professionals, “long term investment in core economy established companies,” and also affirmed that it will continue its existing emerging managers program, which is [wait for it] its worst performing private equity strategy.
As we discussed long form, a fund of funds can only make CalPERS’ returns worse by introducing a middleman who will charge another layer of fees. Late stage venture capital is venture investments that are so mature that they would normally have gone public a while ago. The fact that they haven’t suggests that they won’t hold up well to public disclosure requirements. And on top of that, as Jelincic points out, that also implies that you can expect them only to earn public market returns.4
The new scheme is to buy and hold stakes in core economy established companies.” Huh? How do you earn a private equity type return doing that? And pray tell, how does this make the tiniest iota of sense in terms of paying beneficiaries? Unless these businesses produce tons of cash flow and can pay very high dividends, CalPERS won’t get funds to pay pension obligations. Companies that are steady, high cash generators are the very top target for private equity firms and are bid up to full prices.
Oh, and one other thing the slides do show, that CalPERS intends to have two layers of board between the CalPERS board and the late stage venture and “buy and hold” investments. How can the board possibly discharge its fiduciary duties properly? And how can CalPERS justify all these extra costs?
If you read CalPERS press release, you can see how the railroading process works. The press release starts out with the conditional (“would create,” “would consist”) but then the quotes from Eliopoulos and Frost are all in the indicative (“excited to move forward”, “does just that”, consistent with everything being in “full steam ahead” mode.
Similarly, the press release gives the impression that CalPERS is about to go live with a quote from Investment Committee Chairman Henry Jones saying that the board needed only to “review” each step in in the remaining process before giving “final approval. That indicates the board has approved earlier measures. The next paragraph, which effectively says CalPERS will start soliciting interest for who should sit on the various boards for the new entities, is plausible only if the board has approved funding, a legal structure, and governance measures, among other things. Given the fact that the CalPERS board appears to have been given no substantive information whatsoever, it would seem impossible for them to have taken any votes up to this date.
If you examine CalPERS’ recent closed session agendas, you can see that they haven’t met the timetable for the portion of this scheme that they tried announced first, the fund of funds. Recall that CalPERS sent out a much less than arm’s length “request for information” to a very short list of parties with responses due back in a month that included the Christmas/New Year’s holiday. Staff had published a schedule that included interviews with the board for March or April. There hasn’t been enough time set aside in any of the recent board meetings for that to have happened.
CalPERS is openly trying hoodwink the legislature, beneficiaries and California taxpayers, and make it harder for board members to object to this barmy, Wall Street enriching scheme.
We’ll deal with the substantive objections in more detail later, but this misconduct proves yet again our core critique of CalPERS: It is run for the benefit of staff, with only oversight theater from the board. The fact that former board member JJ Jelincic and new board member Margaret Brown have encountered such fierce resistance, including attacks in the press via captured Sacramento Bee reporter Adam Ashton, show how determined the top brass at CalPERS is to run things its way, rather than serve beneficiaries’ interest. And new CEO Marcie Frost is fully on board with deception and thuggery to preserve and increase her power as opposed to making beneficiaries’ interest her paramount concern.
CalPERS Board Member Margaret Brown Corrects the Record on Misleading CalPERS Press Release Regarding Potential Private Equity Re-Structuring
May 17, 2018- CalPERS board member Margaret Brown, acting in her personal capacity, issued a statement today correcting the misleading implication of a CalPERS press release dated May 17, 2018. In that release, CalPERS incorrectly suggested that the retirement system has embraced a plan to “move forward with” re-structuring its private equity investment strategy and that implementation is pending only the formality of “final review and approval by the [CalPERS] Board.”
In reality, the CalPERS investment staff, acting in conjunction with Larry Sonsini of Wilson Sonsini, has yet to provide the board with written details including budgets, business plans, or a thorough analysis of risks and projected returns.
CalPERS staff have publicly discussed their outline plan on several occasions, including at board retreats in July 2017 and January 2018 These public sessions are available in the “CalPERS Network” archive on Youtube. Examination of this record including the CIO’s press interviews as well as the “talking points” distributed by CalPERS in conjunction with its May 17 press release, reveal that the analysis to-date has been quite thin. While Ms. Brown invites CalPERS staff to build on this outline plan with robust supporting evidence, no responsible fiduciary could support the plan in its current state of development.
The May 17 press release at best was a premature characterization of CalPERS’ private equity restructuring plans, since the organization cannot adopt any plan of this magnitude without first receiving the board’s approval, and the board cannot responsibly consider any proposal such as the one described in the CalPERS press release. At worst, the CalPERS press release might be seen as an attempt to force the board’s hand.
Ms. Brown stated, “California law requires that CalPERS board members act always consistent with their fiduciary duty, which means exercising care and diligence in overseeing investments. The board cannot discharge its fiduciary duty with respect to re-structuring any part of its $40 billion private equity portfolio without first receiving detailed, written budgets, business plans, and analysis of risks and materials supporting claimed projected returns. I, for one, intend to see that the board discharges its fiduciary duty.”
Note: The statements contained in this press release are the personal views of Margaret Brown and do not necessarily reflect the views of the CalPERS Board of Administration, other members of its Board or CalPERS staff.
1 Assuming Eliopoulos wanted to leave at year end, which is his departure date, the logical time for him to have announced would be around July. CEO Anne Stausboll announced she was leaving CalPERS five, not seven, months before her departure.
2 CalPERS will not hire or control these professionals. The new companies will. They will not be CalPERS employees, which is apparently another one of the bad reasons for making this operation so remote from CalPERS. The salaries would not be a matter of public record.
32 Needless to say, the obviousness of that risk creates strong incentives for everyone to engage in valuation fraud, which is already a universally acknowledged practice in private equity that investors bizarrely tolerate.
4 The “late stage venture capital” concept has been fleshed out an iota more by indicating that CalPERS intends to emphasize health care and life sciences, when health care is already an appalling high percentage of US GDP and even card carrying corporate Democrats are being forced to discuss “single payer” as a policy option. The industry is about to come under more and more revenue and margin pressure just when CalPERS wants to dive in. And on top of that, CalPERS’ last foray into health care, a $705 million fund it set up with a doctor who had no investment experience, did so badly it had to be rescinded.CalPERS Unveils Direct Investment Model for Private Equity - CalPERS
CalPERS PE Sick Joke