CalPERS Issues False and Misleading Press Release to Try to Railroad Board on Private Equity Industry Enrichment Scheme

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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.

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  1. flora

    I hope incoming CalPERS Chief Operating Investment Officer Elizabeth Bourqui is reading your NC posts. They will give her a good idea of the terrain she is walking into.

    Thanks again for your continued reporting on CalPERS.

    1. vlade

      Given the CFO hire, it assumes she cares, and wasn’t selected for loyalty over capability.

  2. EoH

    I’m stuck on the CalPERS’s board giving up its right to veto candidates for the CIO position. The two most important activities the board oversees are investing and payouts to beneficiaries. How can it give up a power essential to one of those?

    What board member in her right mind would agree to that, let alone a board that is in the public crosshairs already for inadequately supervising a wayward staff?

    The fund of funds idea, for example, as you elegantly point out, is foolish. It seems to be a threefor: an elaborate way to procrastinate about recognizing a large funding problem, a way to make it larger, a way to preclude the board from being able to impose accountability on staff.

    Will the California’s legislature rein in the chair and CEO of CalPERS? If not, will it make up for its error by hugely increasing funding to CalPERS, after inevitable higher costs and large losses come to pass, but whose recognition will be delayed owing to opaque structures and systemic lack of accountability?

    The legislature seems to have a choice. It can listen to the car brothers, and change the oil before it has to change the engine. Or it can listen to California’s taxpayers sharpening their pitchforks, when their taxes go up and their pensions go down.

  3. Ed Walker

    Fund of funds? This is creepy bad. Fees on top of fees at outrageous levels seems like a prima facie case of violation of fiduciary duties. The process laid out here is absurd and offensive. Time to fire the person responsible for this debacle and any staffer who helped.

  4. flora

    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.

    Where CalPERS is concerned, late stage venture capital sounds like shearing the limited partners almost to the skin, whereas before a small amount of capturable fleece was left unsheared as a pr token of “trustworthiness” by the general partners.

    Very glad Margaret Brown has a seat on the board and is publicly questioning these moves.

  5. Chris Tobe

    However media outlets willing to take on Private Equity offshore secrecy pop up in the strangest places
    Memphis TN
    & Missoula MT

  6. Jim Haygood

    This new circular flow chart on page 5 of the slides is an eye-opener:

    Board actions –> [higher] investment returns –> [higher] funded ratio –> [lower] employer rates –> Board actions

    It’s not clear how lower employer rates lead to Board actions. Actually the causality should run in the opposite direction.

    But it’s an exciting concept, which the white-shoe PE guys are irreverently calling “the investment hamster wheel.”

  7. KYrocky

    This level of corruption demands more accountability, and may I suggest fewer references to “CalPERS staff” and more calling out of these individuals by their names. The “staff” doing an end around the Board is not sufficient when it is this “staff” that are the corrupt actors. Throw the SOB’s under the bus and start printing their names for all the world to see, and bring more pressure on these bad actors.

    1. Yves Smith Post author

      The problem is that CalPERS goes some way to avoid accountability. CalPERS fetishizes calling everyone a “team member” which implies no individual is responsible. They’ve even revised policy documents to include this God-awful phrase.

      We indicated that Ted Eliopoulos and Marcie Frost are driving this particular bus. We can’t be more specific because this entire project is moving forward under the veil of secrecy of closed session. Brown cannot say who has done what or what has been said without committing a crime. She can only say what has not been covered in closed session.

  8. Tom Stone

    The reporting of Adam Ashton in the “Bee” reflects the attitude of the State bureaucracy to the problems at CalPers.
    ANd yes, I do consider the Executive branch and the Attorney General of California as part of the captive bureaucracy.
    It may be hubris on the part of the Board and Staff to propose what amounts to a fraudulent and illegal scheme at this time, more likely it reflects an accurate understanding of how things work in Sacramento…

  9. John Zelnicker

    I have a question, Yves, that you may have answered elsewhere, although I read all of the CalPERS posts with great interest and don’t recall seeing it.

    Can Margaret Brown bring suit against the staff, including the C-suite, for actively working to impair her ability to discharge her fiduciary duty? And, can other members of the Board be included?

    If you have addressed this, just point me to it. Thanks.

    I know such an action, if possible, would be pretty much a declaration of war within CalPERS, but the staff is pushing forward as fast as they can regardless of the consequences. It looks like they’re hoping a fait accompli will be more difficult to reverse. They need to be stopped.

    1. Yves Smith Post author

      Yes, Brown could sue the staff and even the various CalPERS advisers, like its fiduciary counsel and consultants, for breach of fiduciary duty. The State Controller many years ago sued CalPERS over an election issue and won.

      However, she would be excluded from closed sessions on decisions and discussions deemed relevant to her suit. CalPERS is vindictive and would probably try to exclude her from all closed sessions even though that would be a clear overreach.

      1. vlade

        Yes, it would be easy to exclude her from pretty much all closed sessions, as all it would take is to include a point (that would take 10 seconds to do) on the lawsuit. It would really be a nuclear option.

        What is really needed IMO is for the state officials to take their fingers out, and start acting. Which means Cal voters becoming more and more vocal on this.

        I do wonder – there must be a Cal law where tweaking it a bit would make current Board/CEO’s life and plans much harder, so why not try a proposition to get that? It may not even get there, but if it’d able to get enough press to get people talking, it could be enough? It would also mean that CalPers would have to spend resources on fighting against it (which would be fun), which may mean less ability to focus on other things, which again would not necessarily be a bad thing.

      2. John Zelnicker

        @Yves Smith
        May 18, 2018 at 4:42 am
        Thanks very much, Yves.

        I agree with vlade that it would be a nuclear option.

  10. The Rev Kev

    That last set of five slides was for strategic business models? Really? By my count there are roughly 180 words in that set which is less than a good solid post on this site. If you turned that in as a high school assignment you would have gotten an ‘F’ with a sharp comment from the teacher about showing your working here.
    Eliopoulos announces this plan just as he is out the door? I have not much knowledge of corporate governance but that doesn’t sound normal. Bloomberg did a story on this which featured Brown’s comment and you could see from the tone of the article that Bloomberg had their misgivings here. Story at-

    I had the impression that what Bloomberg may have been trying to imply was this-

  11. ChrisPacific

    A private equity fund of funds?

    How can anyone with even the tiniest expertise in investment read that and think it makes sense?

    1. vlade

      Kickbacks, my dear Watson, kickbacks – and/or well paid “consulting” positions later on.

      That’s the way this particular cookie crumbles IMO. The only other option is that the C-suits and a majority of the board are going to star in Dumb and Dumber 3. Although, TBH, these two aren’t really mutually exclusive options.

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