CalPERS continues to tell blatant lies as if it thinks no one is paying attention.
As we’ll show below, CalPERS’ Chief Investment Officer Ben Meng lied repeatedly in response to a question by a state senator, Dr. Richard Pan, both in terms of Meng’s actual statements as well as the implications Meng tried successfully to convey to Senator Pan.
It had been our intention to refrain from criticism of Meng for a while – he joined CalPERS just six weeks ago and could be excused for the ordinary mistakes of learning a new job. But his lies at the legislative hearing were quite serious transgressions and looked willful. Moreover, he directed the misrepresentations to one of the most respected members of the legislature, Senator Ricard Pan, who is a physician and has chaired the state senate pension oversight committee. Commentators have noted to us that Pan bears a seriousness about his role that strongly resembles one of his predecessors in the senate pension committee chair role, Adam Schiff, who went on to his current office as a member of Congress.
This exchange took place at a joint hearing of the Senate Labor, Public Employment and Retirement and Assembly Public Employment and Retirement committees on February 13. A prominent retiree called my attention to the relevant segment, which starts at 1:15:45.
It was gratifying to see Senator Pan ask an important question about CalPERS’ private equity strategy and do so in a way that showed he appreciated the issues involved. That made Meng’s misdirection even more disturbing.
State Senator Dr. Richard Pan: To what degree do you think what steps CalPERS is able to take, as you are in the private equity market, to try to not just maximize returns, that’s obviously goal 1, but also sometimes returns are dependent on what fees people take out as well. You often see articles criticizing the level of fees being charged by these private equity funds. So what are things CalPERS can do to lower the fees, which actually then increases the returns as well and still be able to participate in this.
CalPERS Chief Investment Officer Ben Meng: So Senator Pan, that’s very good questions. Please go to slide 15, the new proposals under discussion, under consideration at CalPERS, the Innovation/Horizon fund. So you are absolutely right, that you know….there are two points when we look at private equity as an asset class. It has delivered the best performance to us in the past. We have all the reason to believe that outperformance is going to continue. But you raise a very good point, there are certain things about private equity as an asset class that we do not like, for example, higher fees. But again the performance we are quoting is net of the fees, after all the fees it is still stands as the best performing asset class. But there are things, as you said, higher fees, lack of transparency, lack of control.
And that is exactly why we are proposing and considering on slide 15, the Innovation/Horizon, that’s the innovation that Marcie was referring to. So in order to achieve 10% return, we need the innovation. Without the innovation, it’s less likely that we can get the target.
But doing the new business model under consideration will reduce the fee, will have more transparency, not less, and will have more control, because we are bringing a lot of investment decisions in house. We have more control in terms of what type of investment, what kind of strategy we will engage, and what is the societal impact. Currently, under the existing model, we have very little say, very little control, in terms of what kind of investment, about what kind of information, the transparency they can share with us. So that’s exactly to your question. We want to continue to benefit from the higher returns, but mitigate the things that we do not like.
Senator Pan: So just to clarify, the Innovation/Horizon in slide 15, those are things are actually being done in house?
Ben Meng: It’s being considered now. So that’s the discussion. The proposal is to bring halfway in house, not all the way in house. Half in house, but we have more control, more transparency, and lower risk.
Senator Pan: So instead of just essentially hiring an outside hedge fund manager, whatever else, for some of these things you’re actually having people in house who will look at some of these things, working….
Ben Meng: Half way.
Senator Pan: I get it. Half way. [crosstalk] Partially in house. But bring some of it in house so therefore we can lower the cost and increase transparency.
This is flagrantly false. If this testimony had been made under oath, Meng would have committed perjury. The only correct thing he said about Innovation and Horizon were their names.
The Innovation and Horizon schemes do not bring any private equity activities whatsoever in house. To testify that it was happening to any degree is a blatant lie. As Stanford’s Dr. Ashby Monk stated last August, and the basic structure of the scheme has not changed since then, CalPERS is setting up new general partners that are completely external to CalPERS.
The other claims Meng made are also clearly false. CalPERS will not have more control. CalPERS in fact will not have any control whatsoever, since it will not employ anyone in these entities nor have any seats on their boards. The investment vehicles will have only powerless advisory boards that are not even selected by CalPERS!
Similarly, the only way influence CalPERS would have on having the investments meet social aims is via the broad policies it sets by contract. CalPERS could stipulate the same requirements in a separately managed fund with a large established private equity fund manager.
Finally, we debunk CalPERS’ claims regarding “greater transparency” in our companion post today. CalPERS admits that there will be no greater disclosure to beneficiaries and California citizens, when it could, as the sole investor in the new vehicles, make public the legal agreements and provide more detail on the funds’ ongoing performance.
Finally notice that Meng didn’t have to offer this barrage of lies to respond to Senator Pan. Senator Pan didn’t ask what CalPERS was doing to lower fees but what CalPERS could be doing. The committee hearing was about to end, so there was no risk of Senator Pan getting into a lengthy conversation about possible strategies. Meng could have mentioned a range of options, like co-investments, larger commitment sizes, bringing private equity in house, and remained silent on whether those were actually part of CalPERS new private equity plans. The scheme never had reducing fees as a goal, and General Counsel Matt Jacobs has confirmed that more transparency would “defeat the purpose” of this initiative. But Meng launched into a “try to fit the square peg in a round hole” sales pitch, apparently because that was what he thought he was supposed to do.
Now admittedly, Meng was put in a position where it would have been incredibly risky for him to have been forthcoming. CalPERS CEO Marcie Frost, who is clearly pushing the half-baked private equity scheme hard, was sitting at his side. And even if she hadn’t been, she would have been sure to find out precisely what Meng said to the state legislature. Frost is Meng’s boss, and Frost has shown no compunction about forcing out a high profile, impeccably credentialed hire (the fact that former Chief Operating Officer Elisabeth Bourqui showed up at the board meeting immediately after her “resignation” with a high-powered employment lawyer at her side was clearly intended to convey that Bourqui’s departure was not voluntary).
This incident shows what a terrible mistake it was for the board to eliminate having the four most important officers report to them: the CEO, the Chief Investment Officer, the Chief Actuary, and the General Counsel. All CalPERS senior executives now report to the CEO.
In private sector asset management firms, no one would ever become the CEO without having considerable investment expertise and likely direct investment management experience; you’d have no credibility with the troops or important outside constituencies otherwise. But at CalPERS, the political aspects of the CEO role are sufficiently important that it has become acceptable to have CEOs with close to zero finance knowledge. That makes it critically important for the Chief Investment Officer to be able to speak candidly to the board and external parties without fearing retribution by a know-nothing CEO.
Getting rid of these direct reporting lines amounted to the board embracing a policy of “Ignorance is Bliss.” CalPERS’ 65-68% funding ratio, even after one mini-bailout by the state (a second one is underway) shows how well this policy has worked out.